Indian government bonds are poised for another selloff in early deals on Wednesday, as rising oil prices and higher US Treasury yields intensify pressure on investor sentiment.
The yield on the benchmark 6.94 per cent 2036 bond is expected to trade between 6.94 per cent and 7.00 per cent, a trader at a private bank said, after closing at 6.9452 per cent, the highest since June 5, in the previous session.
“Bulls are in a cautious zone, and 7 per cent on the 10-year yield now looks inevitable,” the trader said.
Oil prices rose on Tuesday, with the benchmark Brent crude extending gains in Asian trading hours, as concerns over supply disruption intensified after the US and Iran exchanged strikes overnight, dimming hopes for a quick resolution.
The contract was hovering around $96 per barrel, its highest in nearly six weeks, after the two sides targeted each other in the most serious escalation in weeks. The attacks could further restrict traffic through the Strait of Hormuz, a critical waterway that carried about one-fifth of the global oil supplies before the conflict.
Elevated energy prices pressure large importers like India, as a sustained rise could worsen its inflation trajectory and government finances.
Treasury yields also jumped, with the 10-year rising to levels last seen almost three years ago.
Market wagers on the likelihood of a 25 basis point hike by the Federal Reserve later this month have risen to 68 per cent, up from around 41 per cent a week ago, according to the CME FedWatch tool.
The shift followed Chair Kevin Warsh’s Jackson Hole speech in which he indicated the Fed may have to hike rates if inflation does not ease towards its 2 per cent target.
Rates
India’s overnight indexed swap rates are expected to rise to fresh highs.
On Tuesday, the one-year swap rate ended at 6.0150 per cent, and the two-year swap closed at 6.21 per cent. The five-year rate settled 2 bps higher at 6.5050 per cent.