Indian bonds rally as oil slips below $100/bbl, benchmark logs best day in 3 weeks

MUMBAI: Indian government bonds jumped on Monday, with the benchmark yield posting its steepest fall in three weeks, as expectations of a U.S.-Iran peace deal and the potential restoration of crude supplies pushed Brent below $100 a barrel.

The benchmark 6.48% 2035 bond yield ended down 6 basis points at 7.0270%, logging its biggest single-session decline since May 6. It had closed at 7.0917% on Friday.

Bond yields move inversely to prices.

“Long-end yields decreased, as U.S.-Iran peace optimism pushed crude oil prices down, easing inflation fears. We expect, geopolitical risk to remain a major driving force of markets for the foreseeable future,” Tata Asset Management said in a note.

U.S. President Donald Trump said on Saturday that Washington and Iran had largely negotiated a memorandum of understanding on a peace deal that could eventually allow the Strait of Hormuz to open.

Before the war started on February 28, the strait was accounted for nearly a fifth of global oil and liquefied natural gas flows.

However, analysts cautioned that even if a deal is finalised, a full recovery in energy flows is unlikely to be immediate and shipping could take months to normalise.

Benchmark Brent crude was trading around $97.50 per barrel, a level still high enough to keep inflation risks in focus for the world’s third-biggest crude importer.

The Reserve Bank of India’s monetary policy decision is due on June 5.

While though most economists are not expecting any rate action, economists at Standard Chartered Bank and MUFG are among the first to call for a 25-basis-point hike to manage the currency, inflation expectations and capital outflows.

Rates

India’s overnight index swap rates slumped, as lower oil prices and bond yields tempered expectations of an immediate rate hike by the RBI.

The one-year swap ended at 6.15%, while the two-year rate closed at 6.35%. The five-year rate settled at 6.67%.