Indian government bonds extended their losing streak early Monday, tracking a sharp surge in US Treasury yields that reached four-month highs. The benchmark 10-year bond yield climbed to 6.6864% as of 10:35 a.m., rising from Friday's close of 6.6767%, as investors overlooked positive domestic factors including reduced state debt supply.

US Treasury Impact Dominates Market Sentiment

The pressure on Indian bonds stems primarily from developments in the US Treasury market, where yields jumped significantly on Friday. The 10-year US Treasury yield reached 4.2310%, marking its highest level in more than four months. This surge followed investor assessment of dropping weekly jobless claims and their implications for the Federal Reserve's rate easing path.

Market concerns also intensified around central bank independence after Chair Jerome Powell revealed that the Trump administration had previously threatened him with criminal indictments. These developments have created upward pressure on global bond yields, with Indian debt markets feeling the spillover effects.

RBI Bond Purchases Provide Limited Relief

Despite substantial intervention by the Reserve Bank of India, domestic bonds have struggled to find support. The central bank has purchased bonds worth ₹2.54 trillion ($28.00 billion) since December, representing a significant market intervention.

"Higher U.S. yields are keeping the pressure on, and the RBI's buying isn't providing much relief because it's concentrated in illiquid bonds," a private-bank trader explained. The effectiveness of the central bank's intervention has been hampered by its focus on less liquid securities.

Offshore Pressure and Index Concerns

Additional pressure on Indian bonds comes from persistent activity in the overnight index swaps (OIS) market, likely driven by offshore investors. This pressure has intensified following Bloomberg Index Services' decision to defer including Indian debt in its flagship bond index.

State Debt Supply Reduction Fails to Support Market

Despite a significant reduction in planned state debt issuance, bond markets showed little positive response. States plan to raise ₹130 billion ($1.43 billion) through bond sales on Tuesday, representing less than half the originally scheduled ₹386 billion.

The substantial supply cut, which would typically provide support to bond prices, has been overshadowed by the broader negative sentiment driven by US market developments.

Technical Outlook and Key Levels

Traders are closely monitoring technical levels as the 10-year yield approaches critical resistance. "If the 10-year yield breaks 6.70% in the session, the next key level will be 6.77%," the private-bank trader noted, highlighting the potential for further upward movement in yields if current levels are breached.

The current exchange rate stands at $1 = ₹90.7200, providing context for the dollar-denominated figures mentioned in the RBI's bond purchase program.

Indian government bonds have extended their decline following Bloomberg Index Services' decision to defer including local bonds in its flagship Global Aggregate Index. The benchmark 10-year yield has risen nearly 10 basis points since the deferral announcement, adding to market concerns over heavy debt supply and elevated yields.

Global Index Deferral Impact

The unexpected deferral has disappointed market participants who were anticipating significant foreign inflows. Analysts had expected phased inflows of $10.00 billion to $20.00 billion had the inclusion progressed as planned. The decision has compounded concerns in a market already burdened by worries over heavy state debt issuance.

RBI's Record Bond Purchase Program

The Reserve Bank of India has conducted unprecedented bond purchases to support the market, buying ₹2.54 lakh crores ($27.99 billion) since December through open market and secondary market operations. The central bank is scheduled to purchase another ₹50,000 crores next Thursday, with most market participants initially expecting this to be the final round for the current financial year ending in April.

Expectations for Additional Liquidity Support

"The unexpected deferral raises the probability of one more round of liquidity injection by the Reserve Bank of India in the current quarter," said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership. He emphasized that the RBI should continue conducting secondary market bond purchases to alleviate supply pressures.

VRC Reddy, treasury head at Karur Vysya Bank, suggested more substantial intervention may be needed. "The RBI may need to conduct more OMO purchases of around ₹1.50-2.00 lakh crores in February-March, and will have to give out clear yield signals by including liquid papers," he noted.

Market Concerns Over Bond Selection

Traders have expressed frustration with the central bank's focus on relatively illiquid bonds through open market operations this month. Market participants have sought the inclusion of the former benchmark 6.33% 2035 paper in purchase operations. "If you keep on coming out with dead papers, how can you expect any rally," commented a senior trader with a private bank.

Upcoming Market Events

The bond market faces additional uncertainty with the Federal Budget scheduled for February 1 and the RBI's policy decision on February 6. Bond purchases in December and January are already slated to exceed the ₹2.76 lakh crores bought by the central bank between April and November, highlighting the unprecedented scale of intervention required to stabilize the market.