India's benchmark 10-year bond yield snapped a six-session decline on Friday, ending at 6.8533%, up 1.5 basis points from the previous close, as stalled talks between the US and Iran caused oil prices to tick up and curbed risk appetite. As per The Economic Times, the yield had been tracking a sharp fall in oil prices, with the benchmark 6.94% 2036 bond yield slipping 4.2 basis points this week, its fourth straight weekly decline. The pause in the bond rally was attributed to profit-booking by traders following a strong bond price increase, with some investors locking in gains after the recent rally. Alok Singh, head of treasury at CSB Bank, noted that 'we are seeing some profit booking after a good rally, bonds should consolidate in a 6.82%-6.89% range.' According to The Hindu BusinessLine, the yield on the benchmark 6.94% 2036 note is likely to move between 6.823 and 6.88% in the new week, with the trader noting that 'though the current developments do not change the overall view, it makes the journey towards 6.80% target a bit more complicated.'
Oil prices recovered after US-Iran peace talks were scrapped, with Vice President JD Vance dropping plans to travel there, fuelling uncertainty over a lasting truce. As reported by The Economic Times, Brent crude inched higher in Asian trade, briefly rising past $80 a barrel, before settling at $79.48 per barrel, down 9% for the week. However, according to The Hindu BusinessLine, the benchmark Brent crude contract eased below $80 per barrel in Asian trading after the first round of talks between Iran and the US resulted in the two countries agreeing to a roadmap toward a final deal within 60 days. The recovery in oil prices, while still below pre-war levels, negatively impacted investor sentiment and contributed to the pause in the bond rally. The cheaper crude oil had previously been improving India's inflation and fiscal outlook, with Amit Modani, senior fixed income manager at Shriram AMC, noting that 'Indian markets are responding positively to U.S.-Iran deal prospects, which have led to a sharp drop in crude oil prices.'
The US Federal Reserve delivered a surprise hawkish tilt in its policy outlook, even as it kept rates unchanged, with nine of the 18 Fed policymakers pencilling in a rate hike, far more than analysts expected. According to reports from The Economic Times, this development had initially pressured Indian bonds and the rupee in early trade, but foreign buying helped reverse early losses. The two-year Treasury yield jumped to a four-month high, with futures pointing to a hike as early as September, creating ripple effects in Indian markets through India's overnight index swap rates.
Foreign investors have injected more than $2.25 billion into domestic bonds so far in June, providing crucial support to the bond market amid current uncertainties. As reported by The Hindu BusinessLine, the Reserve Bank of India's rate panel chose to adopt a wait and watch approach in keeping interest rates on hold earlier this month, to see if higher oil and food prices are likely to lead to more generalised inflation, according to minutes of the committee's meeting released on Friday. The one-year swap rate ended at 5.9%, and the two-year rate closed at 6.06%, while the five-year rate settled at 6.34% on Friday. These rates showed caution as traders positioned themselves ahead of potential developments in the US-Iran situation and its impact on global oil markets. According to The Economic Times, foreign investors have stepped up bond purchases since the RBI's June 5 measures to boost inflows and New Delhi's tax cuts, net buying 213.5 billion rupees ($2.26 billion) so far this month. Inflows have already hit a 15-month high, with traders expecting more buying before month-end.
Rising concerns about El Niño's expected effects on monsoon rains and inflation are emerging as key factors to watch, according to market experts. As reported by The Economic Times, El Niño conditions are forecast to weaken India's monsoon rains this year to their lowest in 11 years, adding another layer of uncertainty to market sentiment. The weather outlook comes at a time when markets are already grappling with geopolitical uncertainties and global monetary policy shifts. Traders said Indian debt markets still face rate risks from El Niño's potential impact on inflation and growth and elevated global yields after a hawkish U.S. Federal Reserve commentary, as noted by The Economic Times.
Markets are closely watching Bloomberg Index Services' decision on whether to include India in its flagship bond index, which could significantly boost foreign investment into Indian debt markets. According to The Economic Times, inclusion in Bloomberg Global Aggregate Index will add to India's recent efforts to increase foreign inflows into Indian debt and equities. This potential inclusion comes as Indian government bonds traded cautiously early Monday, as concerns over U.S.-Iran tensions tempered relief from falling oil prices. While oil's dip below $80 a barrel eases import costs, traders remain wary of El Niño's impact on inflation and global yield risks, as reported by The Economic Times.
