Fresh US-Iran tensions drag India bonds lower ahead of new 10-year debt sale

Indian government bonds slipped on Friday after oil prices rose amid renewed fighting between the U.S. and Iran, threatening a fragile ceasefire, although investor attention remained focused on the auction of a new 10-year paper.

The benchmark 6.48% 2035 bond yield was at 6.9659% as of 10:30 a.m. IST, after ‌closing at ⁠6.9328% on Thursday. ⁠Bond yields move inversely to prices.

"Renewed attacks are a clear negative for Indian bonds and would keep the bias for yields on the upside, but for now the damage looks contained and we may not see a test of the 7% level today," a trader said.


Oil prices climbed in Asian trading, with benchmark Brent crude rising around 1.5% after fresh fighting ⁠between the ‌U.S. and Iran revived concerns over energy supply disruptions and dimmed expectations of progress in reopening the Strait of Hormuz.

The waterway carries ⁠roughly one-fifth of the world's oil and natural gas flows, and has stayed largely shut since the war started.

The latest escalation comes as Iran accused the U.S. of breaching the month-long ceasefire, while Washington described its actions as retaliatory strikes after Iranian forces fired on U.S. naval vessels moving through the strait.

For India, which imports nearly 90% of its crude oil needs, a sustained rise in prices could ‌stoke inflation, pressure the rupee, widen the current-account deficit and complicate the government's fiscal calculations.

Meanwhile, market participants await the auction of a new 10-year bond, through which ⁠New Delhi aims to raise 340 billion rupees ($3.60 billion). The paper will replace the existing benchmark bond in the coming weeks.

Traders expect the cutoff yield to be 2 basis points lower than the current benchmark bond.

RATES

India's overnight index swap (OIS) rates saw an uptick as traders added paid positions.

The one-year swap rate was at 5.89%, while the two-year swap rate stood at 6.12%. The most liquid five-year OIS rate was at 6.55%. ($1 = 94.5425 Indian rupees)