India Bonds Sink Tracking Global Debt Rout, Oil Jump

The central government bonds joined a global rout early Monday as a rally in oil stoked inflation fears for the world's third-largest crude importer, while fading hopes of an end to the Iran war further soured sentiment. 

The benchmark 6.48% 2035 bond yield was up about 7.5 basis points at 7.1427% by 10:55 a.m. IST - hovering around a six-week high, and on the verge of breaking out to hit its highest in two years.

Bond prices move inversely to yields.

War fears escalated after a UAE nuclear plant was attacked over the weekend, and U.S. President Donald Trump weighed further military action against Iran, threatening a fragile ceasefire in place since early April. Brent crude futures rose 1.69% to $111 a barrel in Asian hours, after gaining 8% last week. Bonds from Tokyo to New York were left nursing losses on Monday after the fresh attacks in the Gulf. The yield on U.S. 10-year note hit a 15-month high of 4.6310%, after surging 23 bps last week.

Higher U.S. yields erode the appeal of emerging-market debt by narrowing the return premium, spurring foreign outflows and putting pressure on the rupee. The rupee also hit yet another all-time low on Monday, falling 0.36% to 96.3125 per dollar.

Also Read: Why Oil Stocks Crashed On May 18 After This US-Iran War Update

"While we maintain the estimates for current account deficit (CAD) to GDP ratio for fiscal year 2027 at 1.7%, assuming oil at $80/barrel on average, risks of CAD widening to over 2% are rising with oil prices remaining above $100," said Madhavi Arora, chief economist at Emkay Global Financial Services.

Traders are also expecting the RBI's surplus transfer to the government this month, which could shore up liquidity and help short-end rates.

Rates

India's overnight index swap rates skyrocketed as traders priced in imminent rate hikes. The one-year swap was up 15.25 bps at 6.31%, while the two-year rate rose 18 bps to 6.56%. The five-year rate surged 18.25 bps to 6.8825%.