Indian Bonds Steady as 10-Year Yield Surpasses 6.75%

Indian government bond yields remained stable on Wednesday after the benchmark bond yield climbed past the 6.75% mark, reaching its highest level in more than six weeks. Market sentiment remained cautious due to the significant debt supply expected in the coming weeks.

As of 10:00 a.m. IST, the benchmark 10-year yield stood at 6.7401%, slightly lower than its previous close of 6.7447%. Earlier in the trading session, it had surged to 6.7530%, its highest level since January 20.

"There is hardly any trading interest in either direction, so the benchmark yield is likely to hover around the 6.75% mark unless a major catalyst emerges," stated a trader from a primary dealership.

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Impact of Heavy State Borrowings

Investor interest in longer-duration government bonds has waned as Indian states gear up to issue substantial amounts of debt ahead of the fiscal year-end. On Tuesday, states collectively raised ₹505 billion ($5.80 billion) through bond sales, with cutoff yields exceeding market expectations, indicating weak demand.

While the central government has concluded its borrowing for the fiscal year, states are expected to raise approximately ₹1.35 trillion in the last three weeks of March. Analysts suggest the actual borrowing could surpass the announced schedule, putting additional pressure on bond yields.

A significant portion of these borrowings will be in the form of longer-tenure bonds, further dampening demand in that segment.

RBI’s Role and Market Uncertainty

The demand for longer-duration bonds has also been affected by uncertainty surrounding potential bond purchases by the Reserve Bank of India (RBI) in March. While the RBI has injected around ₹870 billion into the banking system through a three-year dollar/rupee swap, traders remain uncertain about further liquidity measures. If the RBI refrains from open market bond purchases, yields may continue to edge higher in the near term.

Later in the day, the RBI is set to auction Treasury bills worth ₹330 billion, a move that will be closely watched by market participants for clues on short-term liquidity conditions.

Global Market Influence on Indian Bonds

Global bond markets are also influencing Indian yields. U.S. Treasury yields on longer-duration bonds climbed on Tuesday and extended their upward momentum during Asian trading hours. The movement in U.S. yields has a direct impact on Indian bonds, as higher U.S. yields make Indian debt less attractive to foreign investors.

Earlier, U.S. Treasury yields had softened amid concerns that U.S. President Donald Trump's 25% tariffs on imports from Mexico and Canada, along with the doubling of duties on Chinese imports, could disrupt global trade and economic growth. However, as risk appetite improves, bond yields in the U.S. and emerging markets, including India, may remain under pressure.

Outlook for Indian Bond Yields

Looking ahead, market participants expect Indian bond yields to consolidate around the 6.75% mark in the absence of a major trigger. However, upcoming state debt auctions, RBI policy decisions, and global factors such as U.S. Federal Reserve policy and geopolitical developments will be key determinants of bond market movements in the coming weeks.

A clearer picture may emerge after the RBI’s next monetary policy review, where policymakers could provide insights into future liquidity measures and potential interventions in the bond market. Until then, traders are likely to tread cautiously, with the 10-year benchmark yield expected to fluctuate within a narrow range.