The benchmark 10-year sovereign bond yield approached the critical 7.50% threshold on Tuesday as inflation worries intensified over high energy costs. Traders currently project near-term yields to fluctuate within a range of 7.25% to 7.75% while awaiting the Reserve Bank of India's next interest rate decision. Fixed-income managers at major insurers and lenders are preparing to accumulate positions around these multi-year yield peaks. However, some market participants maintain that swap-market projections of 125 basis points in cumulative rate hikes over the next year are overly aggressive.
Key points
Market expectations are mounting for the Reserve Bank of India to raise its repo rate by…: Market expectations are mounting for the Reserve Bank of India to raise its repo rate by potentially 50 basis points in December.
Analysts anticipate sovereign debt yields will trade within a wide medium-term band spann…: Analysts anticipate sovereign debt yields will trade within a wide medium-term band spanning from 7.25% to 7.75%.
Certain fixed-income investors consider derivative swap pricing for 125 basis points of r…: Certain fixed-income investors consider derivative swap pricing for 125 basis points of rate increases over the coming year to be excessive.
Sources checked by our analysis pipeline: 1
The 10-year yield has risen for 11 consecutive weeks, hitting 7.498% on Tuesday. Persistently high oil prices are stoking inflation concerns and fuelling bets on another Reserve Bank of India rate hike in December, potentially by 50 basis points.
The rupee's struggles are adding to those expectations, with investors weighing RBI chief Sanjay Malhotra's remarks linking price stability with financial stability and acknowledging that monetary policy cannot be entirely separated from the latter.
Yields on India's battered government bonds may be approaching territory that more investors consider a "buy", with that on the benchmark 10-year approaching 7.50%, a level not seen in four years.
For energy importer India, Brent crude oil near $115 a barrel and a struggling rupee remain key risks, but some Indian fixed-income investors reckon the bond selloff has reached a stage where the asset class offers a better risk-reward trade-off.
"We think the 7.50% level is an attractive entry point for the medium term," said Sachin Bajaj, chief investment officer at Axis Max Life Insurance.
He acknowledged that the yield could rise above 7.50% in the…
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