SBI Mutual Fund says 10-year yield will soar beyond 7%

Business Recorder reported that SBI Mutual Fund, one of India's biggest fund houses, now expects the 10-year government bond yield to climb and stay above 7% in the near term. The view reflects a central bank that has turned hawkish as inflation rises, driven by the prolonged Middle East war. Mansi Sajeja, a fund manager at the firm, made these remarks on Thursday.

Budget and currency weaknesses, along with a likely turning point in the rate cycle, will keep long-dated debt under strain, the fund manager said. Because of this, the fund, which holds about $29 billion in debt, will avoid adding longer-term bonds to its portfolio. Investors are also deterred by a gap between demand and the heavy supply of government securities.

Bonds around the world have fallen in recent weeks, with worries about sticky inflation, heavy government borrowing and dearer oil keeping rate expectations high. India's benchmark yield is near 6.96%, up over 20 basis points in four weeks, and the US Federal Reserve is expected to raise rates next Wednesday. Shorter-dated papers, meanwhile, are supported by a large liquidity surplus from inflows into the central bank's foreign currency deposit scheme. The fund said the yield curve could be repriced upward gradually once that liquidity normalises.