Oil slide hands India's 10-year bond its best day since early April

A sharp decline in oil prices unleashed demand for Indian government bonds on Monday, pushing the 10-year note to its best day since early April, as investors rushed to lock in higher yields ahead of the key US midterm elections.

Brent crude futures fell nearly 5% to $108 per barrel in Asian trade, retreating from a six-month peak hit last week as Iranian negotiators left talks with Qatari mediators to end the war with the United States, and a draft proposal was being circulated with a follow-up meeting possible.

For India, the world's third-largest oil importer and consumer, cheaper crude eases inflation and fiscal pressures, while tempering expectations of aggressive monetary policy tightening.


The benchmark 6.94% 2036 bond yield fell nearly 10 basis points to 7.3154%, its steepest one-day decline since early April. Bond yields move inversely to prices.

The rupee strengthened 0.05% to 94.90 per dollar, while the benchmark Nifty 50 index rose 1.7% to 23,440.

The market witnessed a "bull flattening" in both overnight indexed swaps and government bond curves, traders said, as long-end rates fell faster than the short-end, signalling improved expectations for inflation and the policy path.

Attention is now on Tuesday's US midterm elections.

Traders will gauge whether the result alters the prospects for a US-Iran ceasefire and sustained oil price correction, which could shape the interest rate path in India.

"The impact on (Indian) government bonds will depend on a combination of UST yields and impact on crude oil," said Gaura Sengupta, chief economist at IDFC First Bank.

If concerns about an escalation with Iran grow after the results, government bond yields could face upward pressure, Sengupta said.

RATES

OIS rates eased as lower oil prices softened rate hike concerns.

The one-year OIS fell 6.25 bps to 6.6575%, the two-year was down 7.25 bps at 6.6750%, and the five-year pared 8.75 bps to 6.7750%.