Indian government bonds plummeted, while the rupee depreciated to a record low on Monday, following a sharp rise in US Treasury yields and a surge in crude oil prices amid prolonged US-Iran war.
The benchmark 6.48% 2035 government bond yield rose 9 basis points to 6.8261%, after closing at 6.7369% on Friday, reflecting selling pressure in the debt market.
In global markets, US Treasury yields advanced amid rising inflation concerns, which have strengthened expectations of potential interest rate hikes by the Federal Reserve.
The 10-year US Treasury yield rose 3 basis points to 4.41%, its highest level in nearly eight months, while the two-year yield climbed 4 basis points to 3.94%.
Meanwhile, the Indian rupee weakened to a fresh record low of 93.94 against the US dollar. The greenback strengthened as escalating US-Iran war dampened global risk appetite and boosted demand for safe-haven assets.
The dollar index, which measures the US currency against a basket of major peers, rose 0.29% to 99.83.
Why are bond yields rising?
Bond yields move inversely to prices, and recent developments in the bond market have led to a sustained upward movement in yields.
The market is currently contending with multiple pressures. A significant increase in debt supply, coupled with uncertainty over continued support from the Reserve Bank of India (RBI), has weighed on bond prices. As supply rises and demand weakens, yields tend to move higher.
At the same time, elevated crude oil prices amid the escalating US-Iran war have intensified concerns over imported inflation. India is the world’s third-largest crude oil importer, and sustained high oil prices pose a considerable macroeconomic risk, including the potential widening of the current account deficit.
Benchmark Brent crude oil prices were trading near $113 per barrel after Iran warned it could target energy and water infrastructure in neighbouring Gulf countries if US President Donald Trump follows through on threats to strike Iran’s electricity grid.
The US-Iran war in the Middle East has now entered its fourth week, further fuelling volatility in global commodity markets.
“Government bond yields continue to trade higher due to the US-Iran war and crude oil prices sustaining at much higher levels, with the 10-year G-Sec yield hitting 6.83%. However, high yielding corporate bonds are relatively insulated and present an attractive option on the short end,” said Vishal Goenka, Co-Founder of IndiaBonds.com.
Adding to the pressure, Indian states are set to raise ₹57,400 crore through bond sales on Tuesday — nearly ₹10,000 crore higher than previously scheduled, Reuters reported. This would push total issuances to a record level for both the quarter and the financial year.
“No one has clarity on length of war and with both sides giving deadlines and threats in attacking energy infrastructure, any follow through could cause more oil supply and inflationary shocks for Indian government bonds. We are pricing the developments of current news and any future outlook depends on the length and post-impact of war,” said Goenka.
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