India bonds sink on oil spike before Fed decision

Indian government bonds tumbled on Wednesday, reversing most of the previous session's sharp rally, as a fresh jump in oil prices and US Treasury yields rattled investors ahead of the Federal Reserve's policy decision.

The benchmark 6.94% 2036 bond yielded 7.4772% at 10:50 a.m. IST, up 4 basis points from its previous close. The 10-year yield had dropped by nearly five basis points on Tuesday, its steepest single-day decline in three months, after failing to breach 7.50%.

On the day, Brent crude climbed 1.5% to $115.40 a barrel after an attack on a Saudi Arabian biggest refinery revived concerns over supply disruptions from the conflict involving Iran and its proxies.

Bonds Corner Powered By India bonds sink on oil spike before Fed decision

Indian government bonds experienced a significant decline after a prior rally due to rising oil prices. Brent crude oil prices increased following concerns over supply disruptions in Saudi Arabia. The US 10-year Treasury yield also rose, affecting the attractiveness of Indian debt. Markets are anticipating the Federal Reserve's policy decision and rate outlook, impacting investor sentiment.

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India, the world's third-largest oil importer, is particularly vulnerable to oil-price shocks. Brent remains about $45 above its pre-war level, threatening to stoke inflation, widen the fiscal deficit and weigh on growth.

"Moves have become highly corelated to crude," a trader at a primary dealership said, adding that even a slight drop in prices can recover the mood.

The Reserve Bank of India expects inflation to peak at 6% in the July-September quarter, while growth is expected to slow to 7% in fiscal 2027 from 7.7% in 2025-26.

The US 10-year Treasury yield also rose around three basis points to 5.0238%, compressing the spread offered by Indian debt over dollar assets.

Markets are now bracing for the Fed's decision after Indian trading hours. While a pause is widely expected, investors will gauge the central bank's guidance for clues on its rate outlook.

Rates

India's overnight indexed swap rates jumped as higher oil prices and US yields soured sentiment.

The one-year OIS rose 5.5 bps to 6.69%, pricing in nearly 125 bps of rate hikes over the next 12 months. The two-year OIS gained 6.75 bps to 6.74%, while the five-year rose 5.5 bps to 6.87%.
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