Indian bonds seen range-bound as oil eases and US yields climb ahead of CPI

what happened

Reuters reports that Indian government bonds are expected to trade within a tight range on Thursday. Two forces pull in opposite directions: Brent slipped 1% to $91.80 a barrel in Asian trade, which eases worries about India's inflation, currency and fiscal position as an oil importer, while the US 10-year Treasury yield approached 5% after October consumer prices beat forecasts and lifted bets on a bigger Federal Reserve hike in December.

Investors are waiting for India's October inflation print, which a Reuters poll sees at 5.93% year on year, up from 5.54% in September. A surprise to the upside could strengthen expectations of further tightening by the RBI next month. The benchmark 6.94% 2036 bond ended Wednesday at 7.2139% after a 6 basis point rise, its steepest one-day move in a month. Trading was light, and attention is on Friday's auction of 340 billion rupees of the 10-year bond.

Overnight index swap rates in the 1-, 2- and 5-year tenors rose 8 to 9 basis points on Wednesday to 6.3950%, 6.39% and 6.4825%, and may keep climbing alongside US yields.

why it matters

For bond traders the picture is mixed: cheaper crude helps the rupee and public finances, but higher US yields and bets on RBI rate hikes weigh on local bond yields. Friday's auction will test demand for a large supply of paper and could set the tone for near-term trading.

market impact

Indian government bonds: cheaper oil supports prices, while rising US yields and RBI hike bets pressure them.

• ↔Indian government bonds mixed — softer oil eases inflation worries, but rising US yields and RBI hike bets push yields up

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