India bond yields hit 5-week high as surging oil prices add to bearishness before auction

MUMBAI: Indian government bond yields hit a five-week high on Friday as higher oil prices and caution before the weekly debt auction dampened sentiment.

The yield on the benchmark 10-year bond was at 6.3192% as of 10:00 a.m. IST, compared with its previous close of 6.2798%.

The most liquid 6.79% 2034 bond yielded 6.3888%, after closing at 6.3439% on Thursday.

Yields on these bonds hit a resistance of 6.3316% and 6.4016%, the highest since May 9, earlier in the day.

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Oil prices jumped more than 13% on Friday after Israel said it struck Iran, targeting its nuclear facilities and ballistic missile factories, to prevent Tehran from building an atomic weapon, which fuelled worries about disruptions in oil supplies.

The benchmark Brent crude contract hit $78.50 per barrel, its highest since January 27, and was last up 9% at $75.50 per barrel.

India is a major importer of crude oil and higher prices could affect the inflation outlook. Retail inflation eased to 2.82% in May, an over six-year low, from 3.16% in April.

“Oil has suddenly become the most important element to be tracked over the near term and unless we see some meaningful downturn, bonds will continue to remain affected,” a trader at a state-run bank said.

Meanwhile, New Delhi will sell bonds worth 300 billion rupees ($3.49 billion) on Friday, including the liquid seven-year paper, with investors remaining cautious after the central bank’s change in stance last week.

“Auction demand has now become more crucial and will decide whether the technical upside will be broken,” the trader said. RATES Indian overnight index swap (OIS) rates saw paying pressure across the curve, tracking higher bond yields and oil prices.

The one-year OIS rate hit 5.59% after ending at 5.55% on Thursday, while the two-year OIS rate rose 2 basis points to 5.53%.

The liquid five-year OIS was the most affected and jumped six bps to 5.79%.