Bond yields dip as oil prices stabilise, market eyes fresh catalysts

Government bond yields witnessed a decline on Tuesday as oil prices stabilised, alleviating concerns over the escalation of the Middle East conflict. Market participants are now eagerly awaiting new triggers to guide their next moves.

The benchmark 10-year yield closed at 7.1643 per cent, edging lower from the previous session's close of 7.1890 per cent.

"Markets are oscillating between reacting and relaxing in response to geopolitical risks," remarked Anitha Rangan, an economist at Equirus Group.

Oil futures retreated on Monday as traders shifted their focus to market fundamentals, perceiving minimal immediate risk of supply disruptions stemming from the Middle East conflict.

Brent crude, which surged past $92 per barrel earlier in the month due to fears of escalating tensions in the region, was trading around $87 per barrel in Asian trading hours.

Given that India is a major importer of oil, fluctuations in oil prices have implications for retail inflation. Elevated prices could pose challenges for the Reserve Bank of India (RBI) in achieving its inflation target.

The RBI has indicated that rate cuts will be considered once inflation sustains at its 4 per cent target level. However, the monetary policy committee members are divided on the timing of such cuts.

US Treasury yields remained largely unchanged following recent statements from Federal Reserve officials, suggesting no immediate need for rate cuts.

"The prospect of (US) rate cuts is becoming more complex and uncertain. Despite geopolitical tensions, the Fed's rationale for rate cuts was already weakening, with Middle East tensions possibly reinforcing this view," added Rangan.

Investors are now factoring in the possibility of around 40 basis points (bps) of rate cuts by the Fed by year-end, a significant decrease from the over 150 bps anticipated at the beginning of 2024, according to the CME's FedWatch Tool.

Earlier in the day, states raised Rs 12,000 crore through bond sales, falling short of the planned amount for the third consecutive week.

(With Reuters inputs)