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Indian government bonds sold off sharply following the federal budget, with the 10-year benchmark yield hitting its highest level in nearly a year. The market slump was driven by the government's announcement of a record-high borrowing program, which has weakened already fragile investor sentiment.

The government plans to borrow a gross 17.2 trillion rupees ($187.5 billion) in the next fiscal year, which runs from April through March. This news immediately pushed bond prices down and yields up.

Market Reacts to Massive Borrowing Target

The yield on the benchmark 6.48% 2035 bond jumped 8 basis points to 6.78% on Monday, a peak not seen since last March. This move comes as the market grapples with a lack of investor appetite and recent losses on trading portfolios.

Even before the budget announcement, the market showed signs of stress. The 10-year benchmark yield had already risen by around 20 basis points between December and January, despite a 25 basis point policy rate cut and significant debt purchases by the central bank.

Figure 1: This chart shows India's gross market borrowings, highlighting the projected surge to a record 17.2 trillion rupees in fiscal year 2026-27, the key driver behind the recent bond market sell-off.

Why Higher Bond Yields Matter for India's Economy

The 10-year government bond yield is a crucial economic indicator because it serves as a benchmark for borrowing costs across the country. When this yield rises, it creates several challenges:

• Higher Costs for Companies and States: Both corporate and state-level borrowing becomes more expensive, as their loan rates are priced relative to government bonds.

• Increased Government Debt Burden: The government itself must pay more to finance its operations, straining public finances.

• Complicates Central Bank Policy: The Reserve Bank of India (RBI) has been cutting policy rates to support economic growth. Rising market yields work against these efforts, making monetary policy less effective.

Figure 2: The widening gap between the RBI's repo rate and the 10-year bond yield from February to November 2025 illustrates the growing tension between official monetary policy and market-driven borrowing costs.

Analyst Outlook: Caution and a Call for RBI Action

Market analysts are now expressing caution and looking to the central bank for support.

"We remain cautious on bonds, (and) despite the recent cheapening, we do not advocate long positions here and think the 10-year can push closer to 7% near term," said Nathan Sribalasundaram, Asia rates strategist at Nomura. He noted that while the RBI remains the "marginal buyer," the central bank has a low bar for announcing further bond purchases through Open Market Operations (OMOs).

Dhiraj Nim, an economist at ANZ, shared a similar view on the RBI's role. "With macro factors likely to dampen the private sector's bond demand, the RBI is expected to use open market operations to boost liquidity and manage borrowing costs simultaneously," he said.

What Traders Are Watching Next

With the market under pressure, all eyes are on the Reserve Bank of India's monetary policy decision this Friday. While another rate change is not expected, traders and investors are anxiously awaiting any announcements about liquidity injections or new bond-buying programs designed to stabilize the market.

Copper prices continued their sharp decline from a record high, leaving traders to debate whether bullish Chinese investors will step back in after several days of chaotic trading rocked global metals markets.

The intense volatility has some seasoned market observers stepping back, citing heightened risks and a disconnect between financial speculation and softening physical demand. Yet, conversations among traders in China suggest a strong appetite to buy the dip, with analysts unwilling to rule out another major swing higher.

Record Highs Meet a Sharp Reversal

On the London Metal Exchange (LME), the industrial metal sank by as much as 4.2% to $12,600 per ton. This followed a dramatic week where prices first soared to a record above $14,500 last Thursday before crashing below $13,000 in intraday trading on Friday. Other metals, including aluminum, tin, nickel, and silver, also posted steep declines.

The extreme moves capped a strong period for copper, which saw futures gain over 40% in 2025 amid mine disruptions, speculation on demand from the energy transition, and the potential for new U.S. import tariffs.

Copper's price appreciation on the London and Shanghai exchanges shows a steep rally followed by a sharp correction in early 2026.

Chinese Investor Sentiment Fuels Market Frenzy

The recent rally in both base and precious metals was initially driven by a surge of interest from investors in China, where funds have been rotating into commodities amid doubts about the U.S. dollar and a shift away from currencies and sovereign bonds.

However, Friday's selloff was sparked by news that U.S. President Donald Trump named Kevin Warsh, known as a tough inflation fighter, to head the Federal Reserve.

Despite the turbulence, January was the busiest month ever for metals trading on the Shanghai Futures Exchange (SHFE), with copper volumes hitting a record during Friday's downturn.

"Some funds are exiting ahead of the Lunar New Year to avoid risk amid such high volatility," noted Gao Yin, an analyst at Shuohe Asset Management Co. "But the medium- to long-term logic behind this round of rally remains intact. There is a unanimous, bullish consensus among Chinese investors."

Investor Hype vs. Physical Market Reality

The frenzy in financial markets contrasts sharply with softening physical demand. Traders familiar with the industry report that buying from fabricators has been muted, even with the price drop. Many industrial users are also winding down operations ahead of the Lunar New Year holiday.

This disconnect was further highlighted by data showing China's factory activity unexpectedly stalled in December. Copper bulls appear to be looking past weak immediate consumption, focusing instead on broader macro trends like easier global monetary policy, a softer dollar, and increased fiscal spending in developed economies.

Analysts See Dip as "Supercycle" Buying Opportunity

Some analysts believe the current pullback is a strategic entry point.

"The near-term correction will provide a good window to buy," wrote Li Yaoyao, an analyst at Xinhu Futures Co., in a note. The firm suggested copper is entering a "supercycle" of sustained high prices and could trade between 100,000 yuan ($14,385) and 150,000 yuan per ton in Shanghai this year.

As of the latest trading, copper on the SHFE was down 3.4% at 100,110 yuan a ton. In London, LME copper fell 4.2% to $12,601.50 a ton at 12:05 p.m. Singapore time, after closing 3.4% lower on Friday. Other industrial metals also declined, with aluminum losing 2.8% and tin falling by more than 8%. Iron ore in Singapore dipped 0.3% to $103.35 a ton.

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The Japanese yen weakened significantly on Monday, sliding past the key 155 level against the U.S. dollar. The move was triggered by comments from Prime Minister Sanae Takaichi that markets interpreted as an endorsement of a weaker currency, compounded by a strengthening greenback.

Figure 1: The USD/JPY exchange rate chart from October 2025 to January 2026 shows the yen's weakening trend, culminating in its move past the 155 mark.

Takaichi's Comments Fuel Speculative Selling

Over the weekend, Prime Minister Takaichi highlighted the advantages of a weaker yen during a campaign speech for a lower house election scheduled for February 8. She argued that a strong yen hurts exporters' competitiveness and that the current currency weakness represents "a big opportunity for export industries."

Takaichi also noted that Japan's Foreign Exchange Fund Special Account has "coffers that are brimming now," a remark that further fueled market speculation.

Analysts suggested that these comments, especially when combined with U.S. Treasury Secretary Scott Bessent's recent statement that Washington would "absolutely not" intervene in currency markets, were likely to accelerate speculative yen selling.

In response to the market reaction, Takaichi attempted to clarify her position on social media, stating that the press had misunderstood her. "My intention was not to say whether yen appreciation or yen depreciation is good or bad, but to note that 'we want to build a strong economy that is resilient to exchange rate fluctuations,'" she explained.

Despite her clarification, the yen continued its slide. The decline was further supported by a Finance Ministry announcement confirming that Japan had not conducted any foreign exchange interventions in the past few weeks.

Dollar Strengthens on Hawkish Fed Chair Nomination

The yen's fall was not just a story of local politics; it was also driven by strong investor demand for the U.S. dollar.

On Friday, U.S. President Donald Trump announced his intention to nominate Kevin Warsh as the next Federal Reserve chair, succeeding Jerome Powell. This news prompted a dollar recovery after a sharp sell-off last week.

Michael Wan, a senior currency analyst at MUFG Bank, described Warsh as a hawk. "History would suggest he is a hawk with a predisposition to focus on inflation," Wan wrote in a note. He added that Warsh has historically been critical of the Fed expanding its balance sheet and believes the central bank has overstepped its mandate.

While Warsh has more recently voiced support for interest rate cuts, his nomination has led the market to anticipate less aggressive monetary easing from the Fed, strengthening the dollar.

Nikkei's Brief Rally Fades as Tech Stocks Tumble

The yen's depreciation initially provided a boost to the Japanese stock market. Shares of major exporters like Toyota Motor and Subaru rose as a weaker currency makes their products more competitive abroad.

The benchmark Nikkei Stock Average reflected this optimism, at one point climbing over 900 points, a gain of 1.7%.

However, the rally was short-lived. The stock market quickly lost momentum and turned lower as a tumble in major technology stocks erased the early gains.

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Extreme Volatility and Position Sizing Remain the Core Risk

Last week will not be forgotten for some time. Those with exposure to ultra-crowded markets will be acutely aware that trading any financial instrument with a 10-day realised volatility of 186%, as seen in silver, demands both an open mind as to where the collective may push price and a disciplined approach to position sizing. Correctly sizing exposure relative to such extreme levels of volatility is absolutely essential. As the new trading week begins and markets attempt to re-establish fair value and some form of balance, the eruptions seen in several more dysfunctional markets may yet prove to be aftershocks. Carrying risk when one cannot immediately react remains the primary consideration.

Market Flows, Liquidity and Event Risk Drive Price Action

Markets ultimately respond to flows, while liquidity conditions go a long way in explaining the magnitude of price movements. For risk managers, the event risks ahead must also be carefully assessed. Traders are right to ask whether an upcoming event is likely to generate an outsized move or a volatility shock that could materially impact existing exposures. Given the range of possible outcomes, it is also worth questioning whether there is any clear directional skew that provides a genuine trading edge.

US Nonfarm Payrolls the Marquee Scheduled Event Risk This Week

With that framework in mind, it is fitting that the economic calendar is particularly full in the week ahead. The Friday release of US nonfarm payrolls stands out as the marquee risk event. Markets are currently modelling a central estimate of 68,000 net new jobs created in January, with the unemployment rate expected to hold at 4.4%. If realised, this outcome would likely be viewed as supportive for risk assets such as equities, offering enough job creation to limit renewed concerns about the US labour market, but not so strong as to materially reduce expectations for Fed rate cuts in June or July, or the pricing of two 25 basis point cuts by December.

JOLTS and ISM Surveys Still Capable of Moving Risk

Elsewhere in the US, and while likely secondary to nonfarm payrolls, JOLTS job openings and the ISM manufacturing and services surveys still have the capacity to move markets if outcomes prove to be meaningful outliers relative to expectations. RBA Meeting Poses Near Term Risk for AUD Traders Outside the US, the RBA meeting on Tuesday presents a near-term risk for AUD exposures. Interest rate swaps price around 15 basis points of tightening for this meeting, implying a 71% probability of a 25 basis point hike. That said, even if the RBA does raise rates, any AUD reaction may fade quickly unless the accompanying statement is interpreted as sufficiently hawkish to lift expectations for further tightening at future meetings.

ECB and BoE Meetings Likely to Generate Only Short Lived Volatility

The ECB and BoE meetings are not expected to result in changes to policy rates. While there may be some review of ECB guidance and the potential for brief volatility in EUR and GBP pairs, any market reaction should be contained and short-lived.

US Earnings Season Accelerates with Major Tech in Focus

US equity indices will also command attention, with just under 30% of S&P 500 market capitalisation reporting earnings and guidance this week. Alphabet and Amazon are the major heavyweight releases, while trader favourites such as Palantir, AMD, Qualcomm, Iren, Reddit and Barrick are also on the radar.

European Earnings and Index Consolidation Continue

It is a similarly busy earnings week in Europe, with around 30% of Euro Stoxx market capitalisation due to report. European equity indices are consolidating after a modest pullback from recent all-time highs. Conviction around a clear directional move in the DAX or Euro Stoxx 50 remains low, and the indices likely require further work to attract meaningful flows in either direction.

Silver Volatility Highlights Structural Stress in Precious Metals Markets

Attention also naturally remains on silver, gold and the US dollar. Silver, and XAGUSD in particular, has become a case study in trading within a dysfunctional market, with products that typically move in close alignment becoming fractured and misaligned. XAG is trading with a 10-day realised volatility of 186%, equating to daily realised moves of nearly 12%, which is extraordinary. The CME's shift to percentage-based margining and successive increases in margin requirements have clearly contributed, alongside elevated positioning.

China Liquidity and SHFE Selling Triggered the Latest Silver Liquidation

China remains central to the silver narrative and appears to have provided the trigger for Friday's generational moves. Many traders outside China are now familiar with the UBS SDIC silver futures fund (161226), which had become the primary vehicle for Chinese retail investors to gain exposure to silver. When the Shenzhen Stock Exchange halted trading in the fund on Friday, investors were effectively locked in and forced to seek alternative ways to reduce exposure. That exit occurred through SHFE silver futures, with the resulting selling pressure rippling into COMEX futures and triggering a significant liquidation of positions.

Is Silver Near a Bottom or Are Further Aftershocks Ahead

Whether silver has reached a durable bottom is difficult to say. Another round of selling cannot be ruled out as Shanghai futures markets reopen, particularly given the residual stress across leveraged positions and market structure.

Good luck to all.

Source: Pepperstone