Oil shock, Treasury yield spike put Indian bonds under pressure before debt sale

Indian government bonds slipped into the red at the start of a fourth straight session on Friday, as oil prices climbed above the $100-per-barrel mark and the 10-year U.S. Treasury yield hit an 18-month high, souring sentiment ahead of a fresh debt sale.

The benchmark 6.94% 2036 bond yield ‌traded at 6.8571% ⁠as of ⁠10:30 a.m. IST, after closing at 6.8413% on Thursday. Earlier in the session the yield hit its highest level in five weeks.

Oil prices surged on Thursday, with Brent crude settling above $100 a barrel for the first time since May after Yemen's Houthis targeted two Saudi oil tankers in the Red Sea.


The development added a fresh geopolitical risk premium to an oil ⁠market already ‌unsettled by disruptions to key shipping routes including the Strait of Hormuz.

"Supply disruptions from the main route, tanker rerouting, higher insurance ⁠premiums and longer voyage times will further tighten crude availability, pushing up the prices, even if production remains unchanged," a trader with a primary dealership said.

The jump in crude prices has rekindled concerns that inflation could prove more persistent than previously expected for both India and the United States.

Those worries pushed the 10-year U.S. Treasury yield to 4.70%, its highest level since January 2025, as investors frontloaded ‌bets on a rate hike from the Federal Reserve.

New Delhi meanwhile will raise 280 billion rupees ($2.90 billion) through a bond auction later in the day, ⁠including 170 billion rupees of a new 15-year paper. The yield on this note surged 5 basis points in the when-issued segment, trading at 7.05% on Friday.

RATES

India's overnight index swap (OIS) rates continued to witness paying interest, pressured by the twin impact of higher oil prices and rising Treasury yields.

The one-year swap rate was at 6.05%, and the two-year rate was at 6.25%. The most liquid five-year rate jumped to 6.57%.