Some Indian debt fund managers are cutting back on interest-rate hedges against their bond holdings, saying markets have already priced in an excessive rise in borrowing costs driven by a surge in oil prices. According to Bloomberg, Bandhan AMC Ltd. and ICICI Prudential Asset Management Co. are among those who have unwound their overnight indexed swap positions - an interest-rate derivative that benefits from rate rises. Sundaram Asset Management Co. also exited their hedge positions in relatively illiquid corporate bonds. As Suyash Choudhary, chief investment officer for debt at Bandhan AMC, explained, "We are not actively using OIS for hedging for the time being, considering that these were no longer effective given the amount of rate hikes they were pricing."
Indian government bonds held steady in early deals on Tuesday as oil prices eased marginally, with India's benchmark 6.48% 2035 bond yield at 6.8842% as of 10:05 a.m. IST, down from 6.8901% on Monday. According to The Economic Times, traders retained a bullish bias as lower oil prices offered support, though sentiment remains cautious. A primary dealership trader noted that "lower oil prices are lending support to government bonds and keeping sentiment constructive, though traders remain wary that any reversal in crude could cloud the outlook." The ongoing uncertainty over the durability of any temporary truce continues to weigh on market sentiment.
Oil prices were marginally lower on Tuesday, expectations that peace talks between the U.S. and Iran will take place this week and allow more supply to flow from the key Middle East producing region. As reported by The Economic Times, investors are focusing on the likelihood that talks will result in the extension of the existing ceasefire or a final agreement. The U.S.-Israeli war with Iran has turned out to be the largest-ever disruption of global energy supplies, with the Strait of Hormuz, the strategic waterway which handles roughly one-fifth of global oil shipments, remaining largely shut for most of the war. The war has shut this key waterway for crude and refined product flows out of the Persian Gulf to global buyers, particularly in Asia and Europe.
Interest-rate swaps have surged in the wake of the Iran war, with as much as 125 basis points of rate hikes priced in at the peak, according to Bloomberg. Even after recent easing, 50 basis points of potential hikes are still priced in, showing markets continue to price in higher-for-longer interest rates. The two-year swap rate is still trading near 6%, about 40 basis points above levels before the Iran conflict. Manish Banthia, chief investment officer for fixed income at ICICI Prudential AMC, noted that "At the current level of OIS, it doesn't make sense to continue with" those positions, as "OIS is already pricing too much, so it doesn't give me any hedge anymore."
Meanwhile, Indian states are set to raise ₹16,900 crore ($1.81 billion) through the sale of bonds maturing in seven to 30 years, later in the day, as reported by The Economic Times. The $1 = 93.3000 Indian rupees exchange rate continues to provide context for bond market movements, with swap rates having eased by around 60 basis points from their highs hit on April 2, though recent developments suggest some reversal from the previous rally as oil price volatility continues to influence market sentiment.
