Benchmark 10-yr bond yield posts steepest rise in six weeks on rate hike fears

The benchmark 10-year government bond yield ended at 7.2386%, after closing at 7.1550% Wednesday. The yield posted its biggest single session rise since Aug. 5, after having gained five basis points in previous session. The 10-year 7.26% 2032 bond yield ended at 7.1997% after closing at 7.1254% on Wednesday.

Meanwhile, the two-year U.S. yield stayed close to the 15-year high level, and sharply above the 10-year level. The two-year yield typically reflects interest rate expectations.

After an unexpected rise in U.S. inflation, some market participants fear a 100-basis-point rate hike by the Federal Reserve on Sept. 21, and anticipate the RBI would follow up with a third consecutive 50 basis points repo rate hike on Sept. 30.

“Finally, the reality of rate hikes has started to sink in, and talks of index inclusion have taken a back seat,” Debendra Kumar Dash, senior vice president, treasury, at

. “Yield below 7.25% is not sustainable at a time when inflation is so high globally.”

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

Nomura raised its forecast for the terminal repo rate in India, citing elevated inflation and more front-loaded rate hikes by the Fed and the European Central Bank.

The brokerage now sees the repo rate at 6.15% by December, up from the 6.00% forecast previously, including a 50 bps hike at the end of this month.

Intraday, sentiment remained cautious, as market participants await Friday’s debt sale. The government is scheduled to auction bonds worth 330 billion Indian rupees ($4.14 billion), including 130 billion rupees of 7.26% 2032 note that will replace the existing benchmark soon.