India bonds recover on softer US rate outlook; oil risk caps gains

MUMBAI: Indian government bonds rose on Wednesday, clawing back part of the previous session’s losses, after soft U.S. inflation data reduced rate-hike bets, though rising crude oil prices pushed U.S. yields back up and blunted the gains.

U.S. Treasury yields eased overnight after consumer prices rose at a slower-than-expected pace in June. The probability of a Federal Reserve rate hike in July fell to 17% from 42%, CME Group’s FedWatch tool showed.

The U.S. 10-year yield crept back above 4.60% in the second half, as Brent futures extended gains to $85/barrel, fuelled by supply disruptions in the Strait of Hormuz. India, the world’s third-largest oil importer and consumer, remains highly exposed to swings in crude prices, while higher U.S. Treasury yields erode the premium on riskier emerging-market debt.

The benchmark 6.94% 2036 bond yield settled at 6.7738%, after touching a three-week high of 6.7945% on Tuesday.

Traders stayed wary of adding duration until crude cools, as “higher oil will keep inflation and fiscal risks in focus,” a private-bank trader said.

The currently weak refined core CPI allows the Monetary Policy Committee to wait for greater clarity on the inflation trend and risks before defining its course. U.S. policy rate, oil prices and weather-related food price shocks will be on the risk radar, ANZ wrote in a note.

Steady buying from state-run banks and foreign investors, however, helped offset caution.

State-run banks net bought bonds worth 94 billion rupees on Tuesday, CCIL data showed, and dealers expect them to remain on the bid side.

Foreign investors bought 4.7 billion rupees of bonds under the fully accessible route on Tuesday.

Rates

India’s 1-3-year overnight index swaps inched up as paying pressure resurfaced after U.S. Treasury yields climbed. The one-year ended at 5.94%, while the two-year rate closed at 6.12%, and the five-year rate shut at 6.3775%, each higher by around 1 basis point.