India Bonds Fall Before First Fy27 Debt Sale As War Keeps Oil High

The central government bonds fell on the fiscal year's first trading day, pushing the 10-year yield toward a twelfth straight rise as oil climbed after President Donald Trump said attacks on Iran would continue, with traders cautious ahead of a debt sale.

Trump said that Washington would continue to hit targets in the Islamic Republic over the next two to three weeks, dimming hopes of a swift end to the war. Brent crude futures jumped over 6% to $107 a barrel on Thursday.

The International Energy Agency (IEA) head Fatih Birol also warned that oil supply disruptions from the Middle East will rise in April, affecting Europe.

The benchmark 6.48% 2035 bond yield was up about 4 bps at 7.0734% by 11:15 a.m. IST, its highest since May 21, 2024. It ended at 7.0345% in the previous session.

The yield rose 37 basis points in March and 45 bps in fiscal 2026 despite 100 basis points of rate cuts by the Reserve Bank of India.

Oil above $100 per barrel could push inflation beyond 6% and trigger rate hikes in India, HSBC economists said.

The RBI's rate-setting panel meets next week, with a decision due on April 8.

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"The market is pricing in rate hikes in 2026 for now, but those expectations should ease if the war situation cools," a trader at a primary dealership said.

Traders also pared positions before New Delhi's 290 billion-rupee bond auction later in the day, which starts its 8.20 trillion-rupee borrowing programme for the fiscal first half.

India's overnight index swaps edged higher as rising domestic and U.S. yields unwound early receiving interest.

The one-year OIS rate rose 5.5 bps to 6.3%, while the two-year rate hovered 4 bps higher at 6.52%. The five-year swap rate was at 6.8050%, up 1.5 bps.