India bonds could face headwinds from RBI debt sale, elevated Treasury yields

Business Recorder reported that Indian government bond traders were positioned to lift prices early in the week as crude oil fell. Higher US Treasury yields and a central bank debt sale, however, might restrain any rally. A trader at a primary dealership expected the benchmark 6.94% 2036 yield to range from 7.05% to 7.09% on Monday, versus 7.0686% at the previous close.

Brent crude slipped 2.3% to $101.50 a barrel on Monday, after touching nearly $110 last week. Prices eased as investors anticipated a recovery in Saudi shipments, even though Yemeni Houthi attacks have raised Middle East tension and the US and Iran remain deadlocked. According to the trader, a sustained drop below $100 a barrel would be needed to push the 10-year yield close to 7%, with oil only marginally supportive for now.

The Reserve Bank of India will sell 250 billion rupees ($2.61 billion) of bonds via an open market sale, its second such operation as it withdraws liquidity from the banking system. Last week's operation absorbed liquidity close to 0.2% of total bank deposits and was the central bank's first debt sale in nine years, worth 500 billion rupees. Expectations of tighter policy in India have strengthened following the Fed's action, with many participants anticipating a 25 bps repo rate increase on October 7, while the US 10-year Treasury yield held near 5%.