India bonds log worst week in six; rout in oil, rupee hurts short-end debt, swaps
Indian government bonds experienced their sharpest weekly selloff in six weeks, pressured by surging oil prices, rising U.S. Treasury yields, and the rupee's record low, fueling rate hike fears.
- Rising oil prices and U.S. Treasury yields.
- Indian rupee's record low against the dollar.
- Fears of central bank interest rate hikes.
- Geopolitical tensions impacting global commodity prices.
MUMBAI: Indian government bonds endured their sharpest weekly selloff in six, pressured by a continued surge in oil and U.S. Treasury yields, further compounding the weakness induced by the local currency’s relentless plunge to record lows.
The constant bearish move in key fundamentals also brought forward the fears of rate hikes from the central bank, leading to shorter duration bonds and swaps underperforming.
“Geopolitical tensions, higher commodity prices in general, and oil prices in particular, and depreciating currency have resulted in deterioration of inflation, current account deficit, balance of payment and fiscal deficit,” said Gurvinder Singh Wasan, senior fund manager at Baroda BNP Paribas Mutual Fund.
The yield on the benchmark 6.48% 2035 bond ended at 7.0644%, while the five-year 6.36% 2031 bond yield closed at 6.8633% on Friday. The spread narrowed to 20 bps, lowest in two months, and down from 30 bps last week.
Yields move inversely to prices.
The Indian rupee weakened in all five sessions this week, falling to an all-time low of 96.1350 on Friday, as rising oil prices intensified economic challenges, with key indications beginning to show strains.
The 10-year U.S. yield jumped almost 20 bps to 4.55% on Friday, as elevated inflation has negated the chances of any more rate cuts from the Federal Reserve.
The benchmark Brent crude contract rose 7%, moving closer to $110 per barrel, as a deadlock between Iran and U.S. raised bets of supply concerns. President Donald Trump has said he is losing patience with Iran.
“We now assume crude averages $95/bbl for full year and bring forward the view of first rate hike to December from February, with risk of earlier move if (the) West Asian crisis persists and leads to disorderly rise in energy prices,” ICICI Securities Primary Dealership said.
Rates
India’s overnight index swap rates jumped through the week. Rate hike worries led to a reduction in the spread between the one-year and five-year swaps, indicating that the curve could flatten.
The one-year swap ended at 6.17% and the five-year rate closed at 6.71%. The spread compressed to 54 bps from 66 bps last Friday.