10-yr bond yields rise 8 bps to close at 6.438% after India strikes terror bases in Pakistan

Indian 10-year bond yields closed 1.5% or 8 bps up at 6.438 on Wednesday following an early morning strike by the Indian armed forces in Pakistan. The country launched Operation Sindoor, targeting terror camps in Pakistan and Pakistan Occupied Kashmir (PoK) where multiple Lashkar-e-Taiba (LeT) and Jaish-e-Mohammed (JeM) training facilities were destroyed.

The yield on 10-year bond yield with a coupon of 6.79% and the maturity of April 2034 hit the day’s high of 6.454%. The day’s range has been 6.430%-6.454%.

The outlook for bonds is generally bullish as we expect rate cuts to happen, as inflation has been tamed and CPI is running well below the RBI target of 4%. Two risks to our view are the war against Pakistan and an unfavourable monsoon, resulting in higher inflation. RBI is expected to cut rates at least 2-3 times in the current year resulting in repo rates falling to 5.25/5.50%.

Over the last 1-year, it has fallen by 9.29%.

“Traders had lighter books, because they had previously sold on geopolitical tensions, and yesterday (Tuesday) we saw a good participation in the RBI’s open market operation,” a Reuters report said, quoting Umesh Tulsyan, managing director at Sovereign Global Markets. Traders are likely building their positions back following India’s strikes on Pakistan, according to Tulsyan. “We are seeing strong buying in the market and expect the momentum to continue,” he added.

Commenting on the development, Sandeep Bagla, CEO, TRUST Mutual Fund said that today’s rise could be knee jerk reaction on markets including for currency and bond yields due to imminent escalation of border tensions. However, he does not see a major or sustained spike in yields as liquidity is abundant and RBI is expected to cut rates while the inflation expectations are under control. “RBI is expected to pay a substantial dividend soon. Banks have offloaded bonds in OMOs from their HTM portfolio and have enough room and appetite for incremental purchases. Bond yields are likely to remain contained in spite of heightened tensions on the geopolitical front,” Bagla said.Meanwhile, the Indian equity markets were quite volatile with NIfty moving in a 220 points range. Today, the headline index closed at 24,409.30, gaining by 29.70 points or 0.12% over the Tuesday closing price.

The gains were led by auto, bank and consumer stocks. The Nifty Auto index jumped 1.7% while Nifty Bank ended 0.6% higher. The Nifty Consumer Durables was up by over 1%.

Also read: Nifty muscle memory check: India-Pakistan conflicts have meant 5% dip. Will this time be different?

India employed a range of high-precision, long-range strike weapons during the operation, including the SCALP cruise missile, the HAMMER precision-guided bomb, and loitering munitions.

Additionally, the government categorically said that “no Pakistani military facilities were targeted”.