Indian government bonds experienced a decline on Monday, following the negative trajectory of US Treasuries as markets continued to grapple with the aftermath of missing inclusion in Bloomberg's Global Aggregate bond index. The benchmark 10-year bond yield settled higher at 6.6842%, compared to Friday's closing of 6.6767%, reflecting the ongoing pressure in the debt market.

Bond Market Performance

The bond market movement was primarily driven by developments in US markets, where Treasury yields climbed significantly on Friday. The following table shows the key bond market movements:

Bond yields rise when prices fall, and the current movement reflects investor sentiment amid global market uncertainties. The US Treasury yield surge of 7 basis points on Friday came after stronger-than-expected jobs data dampened expectations for Federal Reserve rate cuts.

State Bond Issuance Reduction Ignored

Despite a substantial reduction in weekly state borrowing, market participants showed little positive response. The state bond issuance details are as follows:

Investors largely overlooked this significant supply reduction, indicating deeper structural concerns about demand in the bond market.

Interest Rate Swap Movements

India's overnight index swap (OIS) rates remained under pressure, tracking the broader negative sentiment:

Market Outlook and Budget Focus

Market attention is now turning toward India's federal budget for fiscal year 2027, scheduled for February 1. Analysts at Nomura expressed caution about the bond market outlook, citing supply pressures and lacklustre demand. The research firm expects New Delhi's gross borrowing to reach a record ₹17.50 trillion in the financial year starting April.

The central bank has maintained its support through open market purchases, having bought ₹2.54 trillion of bonds since December. This intervention comes as demand for debt has remained muted since Bloomberg Index Services deferred India's inclusion in its flagship bond index, creating ongoing market challenges for government securities.

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.