Fuel duty cut, states' line-up give Bond Street the jitters

Synopsis

The yield on India's 10-year government bond rose sharply Friday. This increase follows a cut in fuel excise duty which impacted the fiscal outlook. High state bond sales and rising oil prices also contributed to the jump. The benchmark yield has seen its biggest weekly rise since May 2022.

Mumbai: The yield on the 10-year benchmark government bond jumped seven basis points to close at 6.94% Friday, as the cut in fuel excise duty clouded fiscal outlook, intensified by high state bond supply and increasing oil prices.

The yield rose more than 20 basis points this week, the most since May 2022, LSEG data showed.

The 10-year bond opened at 6.93% and traded in a range of 6.95% to 6.90%, according to Clearing Corporation of India data.

"The opening and follow-up action both were weak today. One would have expected some demand to emerge after yields touched 6.95%, but there was no retracement," said Vijay Sharma, senior executive vice-president at PNB Gilts.

Traders are finding it hard to call specific levels in this kind of volatility, especially with the West Asia war ongoing and oil prices staying elevated.

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Brent crude oil prices rose by $1.87, or 1.73%, to $109.88 a barrel, LSEG data showed.

"We cannot project future levels in such volatile conditions, and we do not know what will happen overnight," Sharma said.

Bonds are also under strain as states sold debt worth nearly ₹1 lakh crore during the week, amid waning investor demand.

Financial institutions are expected to face mark-to-market losses as the benchmark yield has increased more than 30 basis points this quarter, from 6.60% on January 1.

Many dealers no longer expect the yield to fall to the 6.75% level, even if the West Asia war ends, which is the best-case scenario.

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