India 10Y Yield Eases from Over 3-Year High

India's 10-year government bond yield fell to 7.40%, retreating from its highest level since March 2023 as softer US Treasury yields and easing crude oil prices improved the outlook for local bonds. The pullback in US Treasury yields eased pressure on Indian debt by reducing global borrowing costs and helping preserve its relative appeal. Additionally, lower oil prices offered some relief to India's inflation outlook and import bill, given its reliance on imported energy. However, crude remained elevated near USD 114 a barrel, keeping inflation risks high and sustaining expectations of further RBI rate hikes. Moreover, persistent rupee weakness could add to imported inflation, while tight domestic liquidity and substantial government borrowing needs may limit demand for bonds. Markets continue to price in significant monetary tightening over the next 12 months, keeping yields elevated despite the recent decline.

India's 10-year government bond yield stood at 7.47%, remaining near its highest level since March 2023 as high oil prices and expectations of further monetary tightening weighed on bonds. Brent crude remained elevated at around USD 115.50 a barrel after an attack on a Saudi refinery revived Middle East supply concerns, keeping inflation risks high for India, which imports nearly 90% of its oil needs. Additionally, persistently high energy costs could strain public finances and worsen the country's external balance. At the same time, the US 10-year Treasury yield rose above 5%, narrowing the yield premium on Indian debt and reducing its relative appeal. Domestic rate expectations have also hardened, with markets pricing in nearly 125 basis points of hikes over the next 12 months. Tighter domestic liquidity has added to selling pressure on government bonds. Investors now await Wednesday's Federal Reserve decision for signals on the US rate outlook and global bond yields.

The yield on India’s 10-year G-Sec edged higher to around 7.46%, extending gains for another session as surging oil prices weighed on investor sentiment, while falling U.S. Treasury yields limited the increase. Brent crude climbed above USD 114 a barrel to a five-month high following Houthi attacks on Saudi Arabia, raising concerns over supply disruptions. As India imports nearly 90% of its oil requirements, sustained price increases threaten to widen the import bill, fuel inflation, pressure the rupee, and weaken public finances. Meanwhile, investors remained cautious ahead of a INR 330 billion government debt sale, keeping demand subdued. The benchmark 6.94% 2036 bond yield rose, nearing the 7.50% level. However, U.S. Treasury yields fell below 5% amid weaker economic data, an equity selloff, and concerns over the returns on AI spending and its growth implications.