Indian government bonds fell on Wednesday as a US Treasury selloff following hotter-than-expected inflation data outweighed relief from lower oil prices.
The benchmark 10-year US Treasury yield jumped more than 12 basis points to 4.9830% in Asian trade after October inflation exceeded forecasts and policymakers signalled a potentially faster pace of rate hikes.
Higher US yields erode the premium offered by riskier Indian bonds, reducing its appeal to foreign investors.
The benchmark 6.94% 2036 bond yield rose around 5 basis points from Monday's close to 7.2005% by 10:40 a.m. IST. Markets were shut on Tuesday for a holiday.
Traders also sold the 10-year bond ahead of Friday's 340 billion rupee ($3.62 billion) auction, which will add substantial supply.
Brent crude fell $6 over three sessions to $92.4 a barrel after US officials downplayed further military action against Iran. It edged higher on Wednesday after sliding to a two-month low of $91.41 in the previous session.
While cheaper oil eases India's inflation and fiscal pressures, investors fear growing odds of a December Fed rate hike could also push the Reserve Bank of India to tighten policy.
"With US CPI affirming possibility of a Fed rate hike in December, it raises the probability of RBI also raising rates in the upcoming policy," a private-bank trader said.
"The 10-year yield may trade in 7.10% to 7.25% range till the next RBI policy."
Traders will now watch India's October inflation data due Thursday. A Reuters poll forecasts annual inflation at 5.93%, up from 5.54% in September.
RATES
Overnight index swaps also rose sharply in tandem with US yields.
The one-year, two-year and five-year rates gained 7-8 bps to 6.38%, 6.3850% and 6.48%, respectively.
($1 = 93.9275 Indian rupees)
