India bonds slump after US-Iran peace talks falter

India's government bonds took a beating on Monday after U.S.-Iran peace talks over the weekend failed to yield a deal to end the war, driving oil prices higher and triggering a risk-off move across assets in the world's third-largest crude importer.

The yield on India's benchmark 6.48% ‌2035 bond rose 6 ⁠basis ⁠points to 6.9697% by 11:00 a.m. IST, from 6.9119% on Friday. The rupee weakened 0.7% to 93.38 per dollar, while the benchmark Nifty 50 fell nearly 2%.

The selloff reflected concern that elevated crude prices could complicate India's inflation and growth outlook, traders said.


"Market participants had bought bonds on Friday in anticipation of a peace deal. Since it has not gone ⁠through, we are ‌seeing some reversal today," said Kruti Chheta, fund manager and fixed income analyst, Mirae Asset Investment Managers (India).

Mutual funds and foreign ⁠lenders were net buyers on Friday, purchasing a combined 62.26 billion rupees ($667 million) worth of government bonds.

U.S. President Donald Trump said on Sunday that the United States will block ships from Iranian ports, while Iran warned that any military vessels approaching the Strait of Hormuz will be considered a breach of the ceasefire.

Benchmark brent crude contract surged 7.2% to $102 per barrel.

Separately, India's banking system liquidity ‌was at 5.54 trillion rupees on Friday - levels last seen in May 2022 -despite the Reserve Bank of India's surprise cash-drain operation last week.

The RBI conducted a ⁠seven-day variable rate reverse repo auction for 2 trillion rupees on Friday, its first such operation in four months.

Meanwhile, traders will also watch for India's March inflation data due at 4:00 p.m. IST for further direction.

RATES

Overnight index swaps rates surged as traders ramped up paying on oil jitters.

The one-year OIS rate added5.5 bps to 5.5875%, while the two-year rate advanced 7 bps to 6.06%. The five-year climbed 9.75 bps to 6.4025%. ($1 = 93.3400 Indian rupees)