Benchmark bond yields soar, post biggest weekly jump in a month

Government bond yields tracked a spike in US peers on Friday, with the benchmark bond yield posting its biggest single-session rise in nearly a month as the government's debt auction added to fresh supply.

The benchmark 7.26 per cent 2033 bond yield ended at 7.1614 per cent, compared to its previous close of 7.1227 per cent. The yield rose 8 basis points for the week, its biggest such move since the week ended February 10.

"Worries about rising local retail inflation and elevated US yields has led to sharp selling in bonds," said Ajay Manglunia, managing director and head of the investment grade group at JM Financial.

"In the run-up to the Reserve Bank of India's monetary policy, we may see test of 7.20 per cent."

US yields jumped

US yields jumped on Thursday, with the 10-year rising above 4 per cent handle, after robust data showed the world's largest economy is on a solid footing, defying fears of a recession despite the Federal Reserve's aggressive tightening.

Earlier this week, the Fed raised interest rates by a widely expected 25 basis points (bps) and indicated another increase, but the market was not convinced by it. The odds of such a move are just 20 per cent.

However, the view that rates may remain elevated for a longer period was gaining ground, leading to selloff across asset classes.

Traders also remained wary of a spike in local retail inflation as well as constant supply amid waning appetite.

New Delhi raised Rs 33,000 crore ($4.01 billion) through the sale of bonds earlier in the day at marginally higher-than-expected cutoffs. The auction included Rs 14,000 crore of benchmark paper.

India's retail inflation jumped to 4.81 per cent in June, after easing in the previous four months. Economists expect the July reading to rise above 6 per cent, at the upper end of the RBI's medium-term target, possibly forcing the central bank to turn more hawkish.