India bonds seen under strain before Fed decision as oil, global yields rise

Overnight indexed swap rates may continue to rise ahead of the Fed decision.

On Tuesday, the one-year INR1YMIBROIS=CC rate gained 6.5 bps to 6.0950%, the two-year INR2YMIBROIS=CC rate jumped 8.5 bps to 6.33%, and the liquid five-year INR5YMIBROIS=CC rate surged 8.5 bps to 6.6550%.

($1 = 95.9500 Indian rupees)

Sentiment has also deteriorated ahead of the Reserve Bank of India's planned open market sales, which traders fear will strain an already fragile supply-demand dynamic.

The RBI will sell 1 trillion rupees ($10.42 billion) of bonds in three tranches beginning Thursday.

"We have opened a can of worms; OMO sales are adding to the supply at an uncertain time, when there is no confidence to buy," a private-bank trader said.

Brent crude futures climbed 3.5% to $108 a barrel in Asian trade as fighting spread across the Middle East. U.S. Treasury yields eased marginally after testing multi-decade highs in the previous session.

On Tuesday, the 10-year U.S. Treasury yield briefly rose above 5%, its highest since the 2008 financial crisis. The average 10-year yield across the Group of Seven largest economies reached 4.285%, the highest since mid-2008.

At home, analysts hardened bets on an October RBI rate hike after annual CPI inflation rose to 4.82% in August from 4.45% in July.

Deutsche Bank has brought forward its rate-hike call to October, citing the prospect of a Fed tightening cycle.