India bonds edge up in choppy session as traders weigh truce prospects

MUMBAI: Indian government bonds inched higher in a choppy session on Monday, with elevated crude oil prices and uncertainty over a truce expiring this week keeping traders cautious.

The yield on India’s benchmark 6.48% 2035 bond settled at 6.8901%, versus 6.9049% on Friday. Bond yields move inversely to prices.

Benchmark Brent crude futures were last at $94.77 a barrel, up 4.82% from the previous session after the U.S. seized an Iranian cargo ship that tried to run its blockade and Tehran vowed to retaliate, putting a fragile truce in jeopardy. The two-week ceasefire expires on Wednesday.

Crude oil imports constitute around one-fourth of India’s total imports, making the country vulnerable to global oil price shocks.

“Traders are still hopeful this war will end soon, which led to same late session buying,” Debendra Kumar Dash, senior vice president of treasury at AU Small Finance Bank.

Dash said he favors shorter-tenor notes given the war and domestic liquidity conditions.

“If the Reserve Bank of India maintains ample liquidity, the shorter-end of the curve will give better risk-adjusted returns,” he said.

The yield on the benchmark 5-year note has climbed nearly 19 bps since the war began on February 28, while the 10-year bond yield has risen around 23 bps.

India’s banking system liquidity surplus widened in April to levels last seen four years ago. It stood at 4.28 trillion rupees as of April 19.

Traders also held back before a bout of fresh debt supply on Tuesday. Indian states will borrow 169 billion rupees on Tuesday through the sale of 7-30 year bonds.

Rates

India’s overnight index swap rates fell on Monday, led by the shorter-end, as traders scaled back some bets of imminent rate hikes this year.

The one-year OIS rate eased 2.25 bps to 5.78%, while the two-year swap rate fell 2.75 bps to 5.9750%. The liquid five-year rate was down 2.25 bps at 6.3525%.