India bonds wipe out early gains as oil rebounds

Early gains in Indian government bonds evaporated on Tuesday after reports of fresh US-Iran attacks kept crude oil prices volatile, with traders also braced for US midterm elections.

The benchmark 6.94% 2036 bond yield was marginally higher at 7.3220% by noon, after falling by 4 basis points in early trade. Yield on the benchmark note had dropped nearly 10 bps in the previous session.

Bond yields move inversely to prices.


Oil prices tumbled more than 7% overnight to $104.8 a barrel after talks between Iranian and Qatari officials raised hopes of a peace deal and stabilisation in Middle East crude supply.

Brent, however, rebounded to $105.8 on Tuesday after reports that the United States struck Iran's Qeshm Island, stoking fears of a broader escalation in the eight-month conflict and prolonged disruption to regional supply. The US 10-year Treasury yield also rose 3 bps to 4.9145%, bouncing off a two-month low in the previous session.

As the world's third-largest oil importer, India is particularly exposed to higher crude prices, which can worsen inflation, strain the rupee and the government's fiscal outlook.

Traders also awaited the result of a 299 billion rupee ($3.15 billion) state-debt auction, a key test of demand after a resurgence in buying over the last few trading sessions.

"With crude back above $105 and headlines still dictating intraday moves, investors are unlikely to add duration with conviction," a private-bank trader said.

Investors are closely watching the US midterm elections, which will determine whether Republicans retain control of Congress during Trump's final two years in office or cede majority control to Democrats.

Opinion polls suggest Democrats could regain control of the House of Representatives and potentially the Senate.

Rates

India's overnight indexed swap rates traded mixed on oil price swings.

The one-year OIS rose about 1 bp to 6.6675%, the two-year was marginally down at 6.67%, and the five-year fell 1.75 bps to 6.76%.