India bonds end flat as oil woes come up against short covering

Indian government bonds whipsawed on Wednesday as oil-driven inflation concerns pushed prices lower before short covering pulled them off lows.

The benchmark 6.94% 2036 bond yield traded in a 7.42% to 7.49% range before ending little changed at 7.44%.

The yield failed to hit 7.50% for a second straight session, triggering a bout of short covering, traders said.


The 7.50% level on the 10-year yield was a key technical resistance, a foreign-bank trader said.

Still, the recovery lacked conviction as elevated crude prices and the Federal Reserve's policy decision due after market hours kept appetite contained.

While the Fed is widely expected to hold rates, investors will parse its guidance for signals on the timing and extent of any future easing.

"A December hike is close to fully priced. If the press conference is similar in tone to previous public engagements by (Fed) Chair (Kevin) Warsh he is likely to come across as hawkish," MUFG said in a note.

Brent crude steadied near $115 a barrel as supply anxieties lingered following an attack on Saudi Arabia's largest refinery.

For India, the world's third-largest oil importer, the surge sharpens risks of higher inflation, a wider fiscal deficit and slower growth.

The oil shock has undermined the rupee, which was last at 95.22 per dollar after hitting 94.46 last week. The currency's renewed slide has rekindled fears that the central bank may have to tighten policy aggressively to stabilise it.

The Reserve Bank of India raised the repo rate and shifted its stance earlier this month, hinting at more hikes.

RATES

Overnight indexed swap leapt higher as traders priced in 100-125 bps of rate hikes in the next 12 months.

The one-year OIS rose 4.5 bps to 6.68%. The two-year OIS gained 6.75 bps to 6.74%, while the five-year rose 6.25 bps to 6.8775%.