Bond yields rise to near 3-month high amid Middle East tensions

Government bond yields saw an uptick on Tuesday, reaching a near three-month peak, driven by concerns surrounding heightened tensions in the Middle East and diminishing expectations of an early US rate cut.

The yield on the benchmark Indian 10-year note closed at 7.1860 per cent, marking its highest level since January 25, following a previous session close of 7.1779 per cent. Notably, the bond market remained closed on Wednesday due to a local holiday.

The rise in oil prices earlier in the day, spurred by Israel's response to Iran's recent missile and drone attack, contributed to the upward pressure on bond yields. However, concerns regarding supply risks eased later in the day, partly due to positive growth data from China, leading to a slight decline in oil prices.

The impact of higher oil prices on retail inflation remains a key concern, particularly considering the inflation easing observed in March. Analysts anticipate that the Reserve Bank of India may delay any interest rate cuts given the current economic environment.

According to economists at Morgan Stanley, rate cuts are unlikely in the current fiscal year, given the robust domestic growth and changes in the Federal Reserve's policy trajectory. They suggest that any escalation in geopolitical tensions or sustained increases in commodity prices, especially oil, could lead to a more cautious monetary stance.

Furthermore, stronger-than-expected US retail sales data for March has reinforced the view that the Federal Reserve is unlikely to rush into interest rate cuts. This sentiment was reflected in the benchmark US 10-year Treasury yield, which reached five-month highs.

Futures markets are currently pricing in 44 basis points of Fed rate cuts by the end of December, down significantly from earlier forecasts. The first rate cut is expected in September, according to CME's FedWatch Tool.

(With Reuters inputs)