India bonds slip on Fed uncertainty, war worries

MUMBAI: Indian government bonds logged a third consecutive session of losses on Thursday, as uncertainty over the Federal Reserve’s rate path lifted U.S. yields, while the widening Gulf conflict also dampened sentiment.

The benchmark Indian 6.94% 2036 bond yield settled at 6.8132%, compared with 6.7964% on Wednesday. It has risen four basis points over three sessions through Thursday.

The 10-year Treasury yield was up 8 bps since Tuesday at 4.68%.

“Geopolitical risks and higher U.S. treasury yields weighed on bonds today,” said Kruti Chheta, a Mumbai-based fund manager and fixed income analyst at Mirae Asset Investment Managers India.

The benchmark brent crude seesawed during the day, hitting a high of $93 per barrel before fallingto trade at around $90 per barrel as of 5:00 p.m. IST.

A drone strike on gas vessels in Egypt’s Mediterranean port of Damietta signalled a potential new front in the U.S.-Iran war, raising the prospect of threats to navigation through the Suez Canal, the last remaining safe export route for Saudi oil.

India is highly sensitive to oil prices as higher crude can simultaneously pressure inflation, the fiscal balance, current account and the rupee.

Uncertainty around the U.S. Fed’s rate path added to the pressure.

The Fed held rates steady on Wednesday, but three of its 12 voting members favoured a hike, while Chair Kevin Warsh did not offer a clear guidance on the policy path.

However, the fall was capped by rising flows from Reserve Bank of India’s measures to attract dollar inflows, traders said. The steps, announced in June, have brought in close to $32 billion into the country, RBI Governor Sanjay Malhotra said earlier this week.

Traders now await the central bank’s policy decision, due on August 5, where it is widely expected to keep its key interest rate unchanged, according to a Reuters poll of economists.

Rates

India’s overnight index swap rates ended mixed as traders searched for fresh cues.

The one-year rate was down 1 bp at 5.92%, while the two-year rate was flat at 6.12%. The five-year rate rose 1.5 bps to 6.42%.