Government bond yields at near 3-month highs amid Middle East worries

Govt bond yields react: Geopolitical tensions in the Middle East and speculation about the Federal Reserve's stance on interest rates have pushed government bond yields to their highest levels in nearly three months. The yield on India's 10-year government bond reached 7.1890 per cent on Tuesday, the highest since January 25, following a close of 7.1779 per cent in the previous session.

Concerns over escalating tensions in the Middle East have led investors to anticipate a prolonged period of higher US interest rates, prompting them to demand higher yields. This sentiment was echoed by a bond dealer at a foreign bank, who suggested that if tensions persist, the benchmark yield may climb further to 7.20 per cent and even 7.25 per cent.

Iran attack fallout

Meanwhile, oil prices saw a rise after Israel's military chief stated that the country would retaliate against Iran's recent missile and drone attack. However, concerns eased slightly after it was revealed that the impact of Iran's attack was less severe than initially feared.

The potential for higher oil prices poses a risk to India's retail inflation, which saw a decrease in March. Economists believe that an interest rate cut in India is still some way off.

Fed rate implications

In the global market, the US 10-year Treasury yield reached its highest level in five months following better-than-expected retail sales data, indicating that the Fed might delay interest rate cuts. This unexpected rise in retail sales, with a 0.7 per cent increase last month, suggests that inflationary pressures are stronger than previously anticipated.

Futures markets now predict a decrease of 44 basis points in interest rates by the end of December, a significant decrease from the over 160 basis points expected at the beginning of the year. According to CME's FedWatch Tool, markets are now pricing in the first rate cut to occur in September.

Additionally, on Tuesday, two Indian states are looking to raise a combined total of $227.54 million through bond sales.

(With Reuters Inputs)