Bond yields rise 8 bps, as OIS rates surge on US inflation data

The rupee weakened versus the dollar as the market braced for a possible 100-basis-point rate hike by the Federal Reserve next week following a higher-than-expected inflation print in the US

Government bond prices fell sharply on Thursday, with yield on the 10-year benchmark paper climbing 8 basis points, as a surge in overnight indexed swap rates spilled over into the sovereign debt market, dealers said.

The rupee too weakened versus the dollar as the market braced for a possible 100-basis-point rate hike by the Federal Reserve next week following a higher-than-expected inflation print in the US.

Yield on the 10-year benchmark 7.26 per cent 2032 bond settled at 7.20 per cent as against 7.12 per cent on Wednesday. Bond prices and yields move inversely. A rise of one basis point in the yield on the 10-year paper corresponds to a fall in price of 7 paise.

The rupee closed at 79.70 per US dollar as against 79.44 per dollar at previous close. So far in 2022, the rupee has depreciated 6.7 per cent versus the dollar.
 

Overnight indexed swaps (OIS), which are a derivative instrument using government bonds as the underlying asset, have risen 20-25 basis points over the past couple of days. The rise in OIS rates has been brought about by expectations of more US rate hikes than earlier expected.

Dealers said offshore clients of some domestic market participants had been unwinding certain positions in the OIS market in anticipation of higher US rates. The domestic players had then balanced out the exposure in the OIS market by selling government bonds and hence pushing yields higher.

“OIS, which is a pure interest rate view market, is showing a domestic repo rate of 6.75 per cent in four months. Our bond yields had fallen over the past month despite a 50-bps rise in US bond yields because there is expectation of global index inclusion. What we are seeing now is some re-pricing according to US rate expectations,” a treasury official with a foreign bank said.

The rupee too bore the brunt of the risk aversion caused by the expectation of an aggressive US rate hike. The last time the Fed hiked rates by 100 bps in a single meeting was in 1981.
 

“Indian rupee drifted further lower following weaker Chinese Yuan and foreign fund selling amid risk-averse sentiments. The Fed has remained quite hawkish in recent commentaries which are offering a good floor to the dollar,” HDFC Securities research analyst Dilip Parmar said. He predicts a range of 79.30-79.90 per dollar over the near term.