India bonds fall as oil spike, Treasury rout weigh

Indian government bonds fell in early trade on Monday, tracking a selloff in U.S. Treasuries as escalating U.S.-Iran tensions lifted oil prices, though hopes of inclusion in Bloomberg's flagship index helped limit losses.

The benchmark 6.94% 2036 bond yield was at 6.7340% as of 10:25 a.m. IST. ‌It had ⁠eased nearly ⁠4 basis points to 6.7139% on Friday, marking the bond's best session in a week. Bond yields move inversely to prices.

U.S. and Iranian forces exchanged heavy strikes over the weekend, with Tehran targeting U.S. facilities in Gulf states and saying it had again closed the vital Strait of Hormuz, while the U.S. said traffic was still flowing.


Brent crude futures ⁠rose 4% ‌in Asian trade to $79 a barrel, while the 10-year U.S. Treasury yield climbed 1.6 bps to 4.5834%.

Traders said higher oil ⁠prices and a monsoon deficit have stoked inflation concerns in India, the world's third-largest oil importer and consumer.

A Reuters poll of economists expects June inflation to rise to 4.3% from 3.93% in May, breaching the central bank's 4% medium-term target for the first time in 16 months. The data is due later in the day.

INDEX HOPES

"Yields should settle after the initial spike, as expectations of ‌inclusion in Bloomberg's Global Aggregate Index are likely to limit selling pressure," a private-bank trader said.

Traders expect Bloomberg Index Services' decision later this week.

Persistent foreign demand has ⁠also lent support, with overseas investors buying more than $1 billion of Indian government bonds under the so-called fully accessible route in July, helped by policy measures, tax breaks and index-inclusion hopes.

RATES

India's overnight index swap rates jumped in early trade tracking offshore paying.

On Friday, the 1-year rate was up 5 bps at 5.82%, while the 2-year rate rose 4.75 bps to 5.9650%. The most liquid 5-year swap rate jumped 4.5 bps to 6.2125%.