Indian Bonds Caught in Negative Spiral as Volatility Doubles

India’s sovereign bond market is seeing its wildest swings in a year.

Volatility in the 10-year debt has doubled in the past six trading sessions, with investors caught between the attraction of Asia’s second-highest yields and the fear spurred by accelerating inflation and an expanding supply of bonds. The yield on the benchmark traded with a 10 basis-point swing on Wednesday before closing at 7.32 percent.

The volatility “reflects a tug of war between shifting fundamentals versus valuations,” said Vivek Rajpal, a Singapore-based rates strategist at Nomura Holdings Inc. “On one hand, we have decent valuations as yields versus repo rate is one of the highest in recent history. This is causing value buyers to jump at higher yield levels. On the other hand, rising inflation, surging crude prices and fiscal concerns are making participants nervous.”

A gauge of 10-day historical volatility in Indian notes due in a decade rose to 17.1 vol Wednesday, the highest since Feb. 2017. The gyrations may continue in the coming weeks with data on consumer price inflation, the federal budget and the Reserve Bank of India’s rate meeting all due.

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