Indian bonds rebound as easing Middle East tensions drag oil lower

Indian government bonds surged at the start of the week, erasing losses from the previous week, after crude oil prices tumbled following a pause in U.S.-Iran strikes over the weekend, boosting hopes for a diplomatic resolution to the conflict.

The benchmark 6.94% 2036 bond yield was at 6.7767%, as of 10:15 a.m. ‌IST, down from ⁠a ⁠closing level of 6.8253% on Friday, when it notched a second consecutive weekly rise.

"Easing crude prices have provided immediate relief to bonds, and bulls are taking the maximum advantage of this, because it may also proved to be short-lived, considering the recent past," a trader with a primary dealership said.


Brent crude prices fell 4% in the previous session and extended losses by another 4% in Asian ⁠trade on ‌Monday to below $93 per barrel after the United States and Iran paused strikes following two weeks of hostilities. The pause reinforced ⁠hopes that shipping through the Strait of Hormuz could gradually return to normalcy.

Oil prices had surged in recent days, with the Brent contract hitting $102 last week, as traders gauged prospects of supply disruptions sparked by tit-for-tat between the warring nations.

The retreat in oil prices is likely to provide relief to the U.S. economy by easing inflationary pressures and giving the Federal Reserve greater policy flexibility ahead of its interest rate decision on Wednesday.

Interest ‌rate futures have assigned a 66% probability of a status quo in this meeting, with market widely expecting a rate hike in September, while the 10-year Treasury ⁠yield eased to 4.64%.

India also benefits from easing oil prices, as the nation is a major importer and higher energy costs would expand the import bill, fuel domestic inflation and worsen the current-account balance, ultimately pushing up odds of monetary tightening.

RATES

India's overnight index swap rates plunged in early trades, as traders unwind their recent aggressive paid positions.

The one-year swap rate was at 5.89%, while the two-year rate was at 6.10%. The most liquid five-year rate dropped to 6.39%.