India bonds sink as oil tops $100/bbl on US-Iran standoff

Indian government bonds fell on Thursday as traders priced in the economic risks of oil surging past $100 a barrel, with Middle East tensions keeping a key energy shipping route blocked.

On Wednesday, Iran seized two ships in the Strait of Hormuz, which transits about 20% of global oil and liquefied ‌natural gas supplies, ⁠a day ⁠after U.S. President Donald Trump announced an indefinite extension to the ceasefire. There was no sign of peace talks resuming.

Benchmark Brent crude closed above $100 a barrel for the first time in more than two weeks on Wednesday, and was last at $103.


India's benchmark 6.48% 2035 bond yield was up 3 basis points at 6.9512%, as of 11:30 a.m. IST, after settling at 6.9225% on ⁠Wednesday.

Traders feared ‌higher oil could balloon India's inflation forecasts and weigh on growth prospects. Oil imports make a fourth of India's total import costs.

"As ⁠long as the Strait (of Hormuz) is blocked, supply-side pressures will persist, making oil costlier and weigh on India's import bill," a private-bank trader said.

"If the government is forced to raise petrol and diesel prices, inflation could rise sharply in the coming months."

Minutes of April's monetary policy meeting showed the Reserve Bank of India viewed rising oil prices as a supply shock, with Governor Sanjay Malhotra saying it ‌was "prudent to wait and watch" before making any decisive move.

The rupee also weakened past 94 in early trade, while the benchmark Nifty 50 was down 0.5% at ⁠24,254.

Separately, U.S. Treasury yields rose on oil jitters, with the 10-year yield up about 3 bps at 4.3214% in Asian hours. Higher Treasury yields dent the appeal of emerging market bonds.

RATES

India's overnight index swap rates surged as higher oil prices and rising Treasury yields dampened sentiment.

The one-year OIS rate rose 5.5 bps to 5.88%, while the two-year swap rate climbed 5.5 bps to 6.09%. The liquid five-year OIS rate jumped over 6.25 bps to 6.48%.