Indian bonds slip as oil surges, Fed outcome looms

Indian government ​bonds fell on Wednesday as ​surging oil prices stoked inflation and supply concerns ahead ​of the Federal Reserve's policy decision, while the rupee slumped.

Oil prices rose 3% on Wednesday, with the Brent contract hitting a one-month high at $114.36 on ‌media reports ⁠that ⁠the U.S. will extend its blockade of Iranian ports.

The benchmark 6.48% 2035 bond ​yield settled at 6.9928%, higher for a third day, compared with 6.9837% ​on Tuesday. It briefly rose to 7% during the session before easing, with traders citing resistance at that level.


"We continue to expect ​the 10-year yield to inch towards ⁠a range of ‌7-7.50% in the second half of the ​year," HDFC ​Bank economists Sakshi Gupta and Deepthi Mathew said ⁠in a note, adding that the government bond curve ​is likely to steepen further in the near-term, with ​ample liquidity supporting short-end yields while inflation worries, higher global yields and foreign outflows will keep long-end yields elevated.

Banking system liquidity has averaged close to 4 trillion rupees in April, per CCIL data. Traders held off buying ahead of New Delhi's ‌290 billion-rupee ($3.06 billion) debt sale on Thursday and avoided risk before Friday's market holiday.

Traders also stayed pat ahead ​of the U.S. ​Fed's policy outcome ⁠due late Wednesday, where it is widely expected to hold rates steady.

RATES

India's overnight index swaps extended their rise as a sharp surge in ​oil dampened sentiment.

The one-year OIS rate was up 3 bps at 5.99%, while the two-year swap rate rose 2 bps to 6.24%. The liquid five-year OIS rate was higher by 2.25 bps at 6.6150%. ($1 = 94.7650 Indian rupees)