India bonds slump on Fed rate hike bets, benchmark trades at discount

Business Recorder reported that Indian government bonds declined on Monday, leaving the benchmark 6.94% 2036 security trading at a discount. Its yield stood at 6.9480% mid-morning, compared with 6.9108% at Friday's close, and briefly touched 6.9538%, the loftiest level since June 11. Yields and prices move in opposite directions, so the slide in prices pushed yields higher.

The sell-off followed hawkish remarks from Federal Reserve Chair Kevin Warsh, who said the central bank still had more to do if inflation was not clearly heading toward 2%. His comments were read as the most explicit hint so far that rate increases could be on the table if inflation stays sticky. Traders now put the odds of a September move at 60%, up from 35% before his remarks, and US Treasury yields jumped with the two-year note leading.

Crude also added pressure, with Brent climbing past $90 a barrel in Asian trading after US forces hit Iran's Larak Island on Sunday, the first reported action inside Iran since late July. Because India buys most of its oil from abroad, a prolonged rise in crude could worsen inflation and strain government finances. Records of the Reserve Bank of India's August policy meeting indicated officials were ready to lift borrowing costs should inflation risks to the upside emerge.