India 10-year bond slumps to lowest in nearly a month as Middle East oil risks heat up

Indian government bonds tumbled early Monday, as escalating U.S.-Iran tensions drove oil prices higher, pressuring the rupee and prompting traders to cut positions in bonds.

The benchmark 6.94% 2036 bond yield rose nearly 5 basis points to 6.828% by 11:55 a.m. IST, the ‌highest in nearly ⁠a month, ⁠from Friday's close of 6.7799%. The rupee weakened 0.25% to 96.52 per dollar.

U.S. forces struck Iran for a ninth straight day on Monday, pushing Brent crude oil futures up 2.5% to $90.34 in Asian trade, the highest since June 11.


India, the world's third-largest oil importer and consumer, is vulnerable to higher crude prices, which can ⁠widen its ‌import bill, strain government finances and weigh on the rupee.

Demand for Indian debt from foreign investors is expected ⁠to moderate after a $4.3 billion rush of inflows since June, with much of the near-term buying seen as already played out, traders said.

Those inflows were driven in part by expectations that Indian bonds could be added to Bloomberg's global aggregate debt index, on which the index provider hasn't provided an update yet.

"Two things are on watch: FCNR flows, which don't look ‌as good as previously anticipated and how the geopolitical situation pans out," a mutual fund trader said.

Reuters reported last week that India has ⁠drawn about $10 billion through the central bank's special deposit programme, only a fraction of the $40 billion-$70 billion estimated by analysts.

A weaker rupee can erode currency-adjusted returns for foreign investors and curb bond demand.

RATES

India's overnight index swaps surged as oil risks intensified.

The one-year rate rose 9.5 bps to 6.02%, the two-year added 10.5 bps to 6.19%, and the five-year climbed 10.25 bps to 6.4775%.

($1 = 96.2800 Indian rupees)