India 10-year yield at three-week peak as oil tops $110

MUMBAI: Indian government bond yields jumped on Tuesday, pushing the benchmark 10-year yield to a three-week high, after oil climbed above $110 a barrel on stalled U.S.-Iran peace talks, fuelling inflation and growth concerns.

The benchmark 6.48% 2035 bond yield jumped 4 basis points to end at 6.9837%, its highest level since April 7.

U.S President Donald Trump was not pleased with Iran’s latest proposal to end the two-month war, officials said on Tuesday, dimming hopes that the warring sides will reach an agreement soon.

Oil prices resumed their upward march, rising 2.6% to $111 a barrel, the highest in nearly a month, as the Strait of Hormuz remained largely blocked. The key water way carries a fifth of global energy supplies.

The longer the strait is effectively closed, the longer curtailments last, the slower the production recovery is likely to be, Goldman Sachs said in a note.

Elevated oil prices are negative for India, which imports about 90% of its oil needs, with oil accounting for roughly a quarter of its total import bill.

“Bond markets at present are not discounting the inflation risk correctly,” said Alok Sharma, head of treasury at ICBC, Mumbai. “I see upside risks to yields as supply-side disruptions could make inflation sudden and erratic.”

U.S. Treasury yields also tracked oil higher to 4.35% during Asian hours, dimming the appeal of emerging market debt. Traders will now closely watch for the U.S. Federal Reserve’s monetary policy decision, due on Wednesday.

Rates

India’s overnight index swap rates also surged to near three-week peaks as rising oil prices dampened sentiment.

The one-year OIS rate was up 9.25 bps at 5.97%, while the two-year swap rate rose 11.25 bps to 6.2350%. The liquid five-year OIS rate

jumped 11 bps to 6.60%.