Oil slide sends India's benchmark yield to two-month low

MUMBAI: Indian government bonds joined a global debt rally on Monday, pushing the benchmark yield to a two-month low, after the U.S. and Iran declared a preliminary peace deal, knocking oil prices to multi-month lows.

While Washington and Tehran will sign the deal on Friday, they have agreed to halt the war and reopen the Strait of Hormuz, which carries a fifth of global oil supplies.

Brent crude futures fell over 5% to $82.80 per barrel in Asian trade, levels last seen on March 10. It is now about $10 above pre-war levels.

The 10-year U.S. yield retreated to a one-month low in Asian trade and that of Germany’s, the euro zone benchmark, slid to a two-week low.

The yield on the Indian benchmark 6.94% 2036 note dropped 2.5 basis points to settle at 6.8704%, its lowest since April 15.

Elevated crude prices have posed a key risk to India’s public finances, pressuring assets in the world’s third-largest oil importer. The 10-year yield is now 20 basis points above pre-war levels, down from a peak of 48 bps.

The rupee’s year-to-date decline also narrowed to 5.6%.

The slump in oil prices will help the Reserve Bank of India’s efforts to channel billions of dollars into debt, helping secure foreign inflows to cover India’s import bill and support the rupee.

Foreign investors have poured nearly $1.6 billion into Indian bonds over the past six sessions.

“From a technical standpoint, we expect yields to ease further towards the 6.75–6.80% range in the near term, supported by improved sentiment and a pickup in FPI inflows into government bonds,” said Dhawal Dalal, president and fixed income CIO at Edelweiss Mutual Fund.

The market will wait for tangible improvements in energy and fertilizer supplies, which could influence the inflation trajectory, he said.

India’s wholesale price inflation rose to 9.68% year-on-year in May, versus 8.26% in April.

Rates

India’s overnight index swap rates slipped further on a sentiment boost from easing oil prices.

The one-year swap rate dropped 4.25 bps to 5.9250% and the two-year rate fell 4.5 bps to 6.08%. The five-year rate pared 3.25 bps to 6.3150%.