India bonds hemmed in by heavy supply, fragile truce

Indian government bonds were little changed early on Friday, weighed down by a heavy supply of the benchmark 10-year note and concerns that a fragile U.S.-Iran ceasefire would keep oil prices high.

The benchmark 6.48% 2035 bond yield was at 6.9580% as of 11:00 a.m. IST, after ending ‌at 6.9601% on Thursday. ⁠The ⁠10-year yield is set for its biggest weekly decline since February 2022.

Traders stayed on the sidelines Friday morning, before New Delhi's 340-billion-rupee sale of the 10-year note. Participants with bearish wagers said the auction will possibly conclude at higher yields, as traders would demand a higher risk premium.


On the off chance the bids are better than expected, "it could lead to ⁠some short ‌covering and a rally in prices," a private-bank trader said.

A fragile ceasefire between the U.S. and Iran has kept traders on ⁠edge, as oil supply disruptions threaten to mar India's macro and rate outlook. India, which imports nearly 90% of its oil, is among the most vulnerable nations to a prolonged supply disruption.

The two-week ceasefire between the U.S. and Iran showed further strain on Friday, a day before they are to negotiate in Pakistan. There was no sign Iran was lifting its near-total blockade of the ‌strait and Israel continued striking Lebanon putting the truce in jeopardy.

Shipping traffic through the Strait of Hormuz stood at well below 10% of normal volumes on ⁠Thursday, keeping hundreds of tankers stuck in the Gulf since the war began, disrupting global oil supply by 20%.

RATES

India's overnight index swap market saw receiving bets early on Friday.

Flush liquidity drove one-year OIS rate down 5.5 bps to 5.81%, while the two-year rate eased 6.5 bps to 6% and the five-year fell 5.25 bps to 6.34%, as some traders pared risk after the ceasefire held for a second day.

($1 = 92.4500 Indian rupees)