India bonds end choppy quarter at over 2-year lows as rate hike bets mount

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Global bonds were headed for their worst month in years, hurt by deteriorating government finances, heavy issuance and rising inflation as the seven-month-old US-Israeli war with Iran kept energy costs high.
The benchmark 6.94% 2036 bond yield closed at 7.1879%, up 24 basis points in September and about 44 bps for the quarter, still outperforming global peers as strong government finances and ample banking system liquidity provided support.
Indian government bonds closed the quarter at their weakest levels in more than two years. Fluctuations in oil prices and rising global yields influenced market conditions significantly. Anticipations regarding rate increases by the Reserve Bank of India affected bond supply fears after increased long-term bond issuance. India's inflation rate in August exceeded the RBI's medium-term target, showing persisted price pressures.
"India has been resilient despite energy, trade, weather, and capital flow volatility. Anchored inflation expectations and fiscal discipline underpin economic resilience," analysts at DBS said in a note.
The 10-year US Treasury yield rose around 81 bps over the quarter.
Central banks globally have raised rates as the Iran war pushes up energy prices and inflation. The RBI has held rates so far, but markets widely expect an increase next week.
Expectations of India's first rate increase in nearly four years added to supply concerns after New Delhi increased long-term bond issuance and the RBI sold the most bonds in a decade to drain a record cash surplus.
The multi-front pressures have also created divergences in performance of Asian bonds as investors navigate cues ranging from energy price volatility to debt supply calendars.
"Indonesia and the Philippines remain most exposed to external risks in the near term," analysts at ANZ said in a note.
"India, South Korea and Thailand should prove relatively resilient, although elevated energy prices remain a key risk to inflation and bond yields."
India's retail inflation accelerated to 4.82% in August, above the RBI's 4% medium-term target, with data showing that price pressures are broadening beyond the volatile food and fuel categories.
RATES
Reflecting the pressures, India's one-year overnight indexed swap rate -- a gauge of monetary policy expectations -- climbed 45 bps on the quarter and 21 bps in September to end at 6.21%, signalling that traders anticipate nearly 100 bps of monetary tightening over the next 12 months.
On Wednesday, the two-year swap rate ended at 6.4075% while the 5-year ended at 6.65%, up 50 and 48 bps, respectively, on the quarter.
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