Bonds see worst week in 3 months on rate hike risks, index inclusion jitters

Bonds see worst week in 3 months on rate hike risks, index inclusion jitters

16 Sep    Finance News

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MUMBAI — Indian government bonds see their worst week in over three months, as traders turn cautious with rate hike fears gripping the market, and lack of any development on the much-anticipated inclusion of local bonds in global indexes.

The benchmark Indian 10-year government bond yield ended at 7.2660%, after closing at 7.2386% on Thursday. The yield rose 10 basis points this week, the biggest such move since week ended Jun. 3.

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The 10-year 7.26% 2032 bond yield ended at 7.2310%, after closing at 7.1997% on Thursday. The yield on this paper which will replace the existing benchmark soon jumped 12 bps this week.

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“With the inflation prints, it is very clear that repo rate will be raised to at least 6%, and even more after December,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

The recent rise in yields follows a drop in the past three weeks led by strong bets of an imminent addition of Indian debt to global indexes.

Meanwhile, elevated inflation in India as well as the U.S. and a sharp spike in U.S. yields have shifted the focus back to rising interest rates, in the absence of any development on the index inclusion front.

The two-year U.S. government bond yield, typically seen as a benchmark for interest rate expectations, touched fresh 15-year highs this week after having risen 35 basis points in the five days to Friday at 3.92%.

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The 10-year yield continued to rise, and is set to post its seventh consecutive weekly rise. It was at 3.45%, up 15 bps for the week.

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The Federal Reserve is due to announce its policy decision on Sept. 21, which is expected to guide the Reserve Bank of India’s (RBI) policy meet on Sept. 30.

The RBI has been focussing on controlling inflation that has stayed above its tolerance range for an eighth straight month. The RBI targets inflation in the 2%-6% band and has hiked the repo rate by 140 basis points in May-August.

Nomura, Barclays and Capital Economics expect the RBI to hike repo rate by 50 bps this month. (Reporting by Dharamraj Lalit Dhutia Editing by)

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