Indian bonds slip as oil surges, Fed outcome looms

MUMBAI: Indian government bonds fell on Wednesday as surging oil prices stoked inflation and supply concerns ahead of the Federal Reserve’s policy decision, while the rupee slumped.

Oil prices rose 3% on Wednesday, with the Brent contract hitting a one-month high at $114.36 on media reports that the U.S. will extend its blockade of Iranian ports.

The benchmark 6.48% 2035 bond yield settled at 6.9928%, higher for a third day, compared with 6.9837% on Tuesday. It briefly rose to 7% during the session before easing, with traders citing resistance at that level.

“We continue to expect the 10-year yield to inch towards a range of 7-7.50% in the second half of the year,” HDFC Bank economists Sakshi Gupta and Deepthi Mathew said in a note, adding that the government bond curve is likely to steepen further in the near-term, with ample liquidity supporting short-end yields while inflation worries, higher global yields and foreign outflows will keep long-end yields elevated.

Banking system liquidity has averaged close to 4 trillion rupees in April, per CCIL data.

Traders held off buying ahead of New Delhi’s 290 billion-rupee ($3.06 billion) debt sale on Thursday and avoided risk before Friday’s market holiday.

Traders also stayed pat ahead of the U.S. Fed’s policy outcome due late Wednesday, where it is widely expected to hold rates steady.

Rates

India’s overnight index swaps extended their rise as a sharp surge in oil dampened sentiment.

The one-year OIS rate was up 3 bps at 5.99%, while the two-year swap rate rose 2 bps to 6.24%. The liquid five-year OIS rate was higher by 2.25 bps at 6.6150%.