India bonds steady as dicey Iran truce, liquidity crunch curb appetite

MUMBAI: Indian government bonds barely budged on Monday, as lingering risks to the U.S.-Iran truce and tight banking-system liquidity kept traders largely on the sidelines.

U.S. and Iranian officials made “encouraging progress” in their first round of talks in Switzerland, mediators said, though tensions persisted over Lebanon and the Strait of Hormuz.

Brent crude oil prices again fell below $80 per barrel in Asian trade, offering some relief to major oil-importers such as India.

The yield on the benchmark 6.94% 2036 note ended at 6.8473%, compared with 6.8533% on Friday. Market participants expect bonds to consolidate this week, after four weeks of gains.

“Traders are still grappling with how the U.S.-Iran deal will pan out as there are a lot of hiccups,” said Debendra Kumar Dash, senior vice president of treasury at AU Small Finance Bank, adding that tight liquidity will keep bonds rangebound.

Liquidity remained at near-neutral levels over the weekend, per RBI data, due to tax outflows.

Bond market traders are also closing tracking the scale of foreign inflows after the Reserve Bank of India’s policy sweeteners and New Delhi’s tax cuts.

Foreign investors have net bought 213.5 billion rupees ($2.26 billion) of government bonds this month.

Buying is at a 15-month high and expected to rise further, even as a pickup in U.S. Treasury yields following a more hawkish tone set by new Fed Chair Kevin Warsh poses some risk to investor appetite for emerging market debt.

The premium on 10-year Indian government bonds over U.S. Treasury yields narrowed to 235 basis points on Monday, its lowest since March 20, as the U.S. Treasury yield rose 4 bps to 4.49% in Asian trade.

The next major trigger will be Bloomberg’s decision on whether to include Indian bonds in the Global Aggregate Index, with an announcement expected this month.

Rates

India’s overnight index swap (OIS) rates fell as softer oil supported sentiment.

The one-year swap rate fell 2.75 bps to 5.8775%, while the two-year rate slumped 4.75 bps to 6.02%. The five-year rate dropped 4.5 bps to 6.3025%.