Indian government bonds fell on Monday, with the benchmark paper slipping into discount, as hawkish comments from US central bank chief bolstered expectations of an interest rate hike next month, and as oil prices jumped above $90 a barrel.
The yield on the benchmark 6.94 per cent 2036 bond was at 6.9480 per cent as of 10:45 am IST, after closing at 6.9108 per cent on Friday. Earlier in the session, the yield touched 6.9538 per cent, its highest level since June 11.
Bond yields move inversely to prices.
“Sentiment has turned distinctly bearish as a more hawkish Fed, rising crude prices and the local central bank’s readiness to act on inflation leave little room for yields to ease,” a trader with a state-run bank said.
US Treasury yields rose sharply on Friday, led by the policy-sensitive two-year note, after Federal Reserve Chair Kevin Warsh said the central bank would still “have work to do” if officials were not convinced inflation was moving sustainably toward 2 per cent.
Warsh’s comments were seen as the clearest signal yet that policymakers could consider rate increases if inflation remains sticky, and boosting bets of a rate hike next month.
Markets are now assigning a 60 per cent probability to a September move, up from 35 per cent before the commentary.
Oil prices added to the pressure, as the benchmark Brent crude rose above $90 a barrel in Asian trade after US forces struck Iran’s Larak Island on Sunday, the first reported strikes inside Iran since late July.
For India, which imports most of its oil needs, a sustained rise in crude prices could worsen the inflation outlook, and impact government finances.
Minutes of the Reserve Bank of India’s August meeting showed policymakers remained prepared to raise interest rates if upside inflation risks materialise.
Rates
India’s overnight indexed swap rates (OIS) rose sharply as traders factored in the possibility of a Fed rate hike next month.
The one-year swap rate was at 6.02 per cent, while the two-year rate was at 6.22 per cent. The most liquid five-year rate jumped 8 bps to 6.52 per cent.