India 10-year bond yield ends at 3-week low, as bets of peace rise, oil dips

MUMBAI: Indian government bonds surged on Wednesday, with the 10-year benchmark bond yield ending at its lowest in three weeks, as oil prices drifted lower on expectations of renewed U.S.-Iran talks to end the war in the Middle East.

The 6.48% 2035 bond yield ended at 6.8662% after closing at 6.9355% on Monday. Indian markets were closed on Tuesday for a local holiday.

“We think the risk/reward is moving in favour of receiving rates. As geopolitical risk premia fade, we expect a retracement in yields,” Barclays said in a note.

“Our base case is for the RBI to refrain from tightening policy this year and to maintain its approach to providing durable system liquidity.”

Last week, the Reserve Bank of India kept rates unchanged and retained its “neutral” monetary policy stance.

Oil prices eased on Wednesday as traders hoped that the U.S. and Iran may eventually release supply, trapped by the closure of the Strait of Hormuz, from the key Middle Eastern producing region.

Forty-five days after Iran’s Revolutionary Guards declared the strait closed, effectively shutting about 20% of global oil and liquefied natural gas shipments, transit through the waterway remains uncertain despite a two-week ceasefire.

Talks to end the war could resume in Pakistan over the next two days, U.S. President Donald Trump said on Tuesday, after the collapse of negotiations over the weekend.

Higher oil prices are detrimental to India, which largely depends on imports to meet its requirements, and have pushed up bond yields and dragged the local currency lower since the war started on February 28.

Rates

India’s overnight index swap rates witnessed continued receiving interest tracking bond yields and a fall in oil prices.

The one-year OIS rate ended at 5.76%, while the two-year swap rate closed at 5.98%. The liquid five-year rate settled at 6.3250%.

The swap rates have eased by around 60 basis points from their highs hit on April 2.