India’s benchmark long-term government bond yields rose sharply in early trade on Thursday, extending losses from the previous session, as concerns over upcoming debt supply and global yield movements weighed on sentiment. The benchmark 10-year bond yield climbed to a two-week high of 7.24%, up from 7.19% on Wednesday, as traders braced for a fresh round of heavy debt auctions amid tight global liquidity conditions.
Key Factors Behind The Yield Spike
- Debt Sale Concerns:
The government is scheduled to auction bonds worth ₹32,000 crore on Friday, including ₹14,000 crore of the benchmark 10-year paper, ₹10,000 crore of a 5-year bond, and ₹8,000 crore of 40-year bonds. Market participants expect muted demand at prevailing yields, which may push rates higher at the auction. - US Treasury Moves:
US 10-year yields surged to 4.55% overnight, driven by stronger-than-expected ADP employment data and hawkish Fed commentary, prompting global investors to reassess emerging market bond holdings. - Rupee Weakness:
The rupee fell to 83.61/$, further weighing on bonds as foreign investors seek currency stability amid narrowing rate differentials. - Liquidity Tightness:
Reserve Bank of India’s (RBI) daily VRRR (Variable Rate Reverse Repo) auctions continue to absorb excess liquidity, leaving banks with lower surplus for government securities.
Market Snapshot
| Instrument | Previous Close (%) | Current Yield (%) | Change (bps) |
|---|---|---|---|
| 10-Year G-Sec | 7.19 | 7.24 | +5 |
| 5-Year G-Sec | 7.05 | 7.09 | +4 |
| 40-Year G-Sec | 7.48 | 7.52 | +4 |
| US 10-Year Treasury | 4.48 | 4.55 | +7 |
Bond Supply Pressure
The heavy government borrowing programme remains a primary factor for yield movements. The Centre plans to raise ₹14.13 lakh crore in FY26 via gross market borrowings, with ~₹8.88 lakh crore in H1FY26 alone. Analysts caution that supply-demand imbalances could persist unless RBI intervenes through OMOs (Open Market Operations).
Treasury And Global Rate Dynamics
| Region | Benchmark Yield (%) | 1-Week Change (bps) | Driver |
|---|---|---|---|
| US | 4.55 | +14 | Hawkish Fed, jobs data |
| Eurozone | 2.79 | +10 | Inflation resilience |
| India | 7.24 | +6 | Debt sale concerns, global cues |
| Japan | 1.10 | +3 | Yield curve control tweaks |
Analyst Views
- Suyash Choudhary, Head of Fixed Income, Bandhan Mutual Fund:
“With US yields trending higher and a sizeable supply pipeline locally, Indian bonds face near-term upward pressure on yields. However, macro stability and inflation within RBI tolerance remain supportive for medium-term demand.” - Rahul Ajmera, Economist, ICRA:
“Expect 10-year yields to trade in a 7.20-7.30% range in July, with risk tilted to the upside if global yields harden further or if auction cut-offs come higher than market levels.”
Impact On Debt Market Dynamics
- Primary Dealers (PDs) Under Pressure:
PDs may have to absorb larger auction tails if investor demand remains muted. This will impact their funding costs and market-making spreads. - Bank Portfolio Valuations:
Rising yields lead to mark-to-market (MTM) losses for banks holding large HTM and AFS bond portfolios, though RBI’s HTM relaxation till March 2026 offers partial relief. - Corporate Bond Spreads:
Corporate yields also hardened by 4-6 bps, with AAA PSU bonds trading near 7.64% for 10-year maturities, widening spreads over sovereign papers. - Mutual Fund NAVs:
Debt mutual funds, particularly long-duration and gilt funds, reported mild NAV declines reflecting yield rises, though inflows remain steady amid stable credit outlook.
RBI’s Policy Stance And Market Expectations
While the RBI has maintained a neutral policy stance with repo rates at 6.50%, market participants expect the central bank to hold rates steady through 2025 despite global tightening bias, as India’s CPI inflation continues to moderate towards 4.5% levels.
However, the possibility of incremental VRRR auctions, forex interventions, or liquidity absorption operations could keep overnight and short-term rates elevated, influencing the entire yield curve.
Historical Yield Comparison
| Fiscal Year | Average 10-Year G-Sec Yield (%) |
|---|---|
| FY23 | 7.30 |
| FY24 | 7.18 |
| FY25 | 7.22 |
| FY26 (YTD) | 7.21 |
Future Outlook
Analysts suggest the following scenarios for the bond market in H2FY26:
- Bullish Scenario:
US yields stabilise below 4.4%, oil prices remain under $70/bbl, and RBI conducts OMO purchases to absorb supply, pulling 10-year yields back towards 7.10%. - Bearish Scenario:
Continued US data strength drives global yields higher, rupee weakens further, and domestic inflation rebounds, pushing Indian 10-year yields above 7.30%.
Conclusion
India’s government bond market remains under pressure ahead of scheduled debt auctions amid rising global yields, tighter liquidity, and investor caution. While fundamentals remain supportive, with stable growth and inflation, external shocks from US Treasury movements could drive volatility in coming weeks.
Traders and institutional investors will closely track RBI’s liquidity management, global crude price trends, and FPI flows to recalibrate their bond strategies as the government ramps up its borrowing programme in FY26.
Disclaimer: This news content is for informational purposes only and does not constitute investment, trading, or financial advice. Readers are advised to consult certified financial advisors and track official RBI auction announcements before making market decisions.
