Indian Bonds Fall For Third-Straight Session As Oil Prices Rise, Market Absorbs Rs 32,000 Crore Of Debt Supply

Indian bonds have fallen for three consecutive sessions amid heightened US-Iran tensions. A fresh rise in crude oil prices, coupled with a fresh supply of bonds on April 24, kept investor interest dampened in the secondary market.

The 10-year benchmark government bond (G-Sec) yield has risen above 6.97 per cent, the highest level seen since April 7. Bond prices and yields move in opposite directions, and a rise in yields leads to a fall in bond prices. Investors remained cautious on the persisting tensions in West Asia, with the sharp rise in crude oil prices expected to trigger a rise in inflation along with widening the fiscal gap for the government, as 90 per cent of India's crude oil requirements depend on imports.

US President Donald Trump said that the U.S. is under no pressure to end the war with Iran, but warned that time was limited for Tehran to make a deal. “I have all the time in the World, but Iran doesn’t – The clock is ticking!” Trump wrote in a post on Truth Social. Meanwhile, he also announced a three-week extension to the ceasefire between Israel and Lebanon, adding that he hopes to host Israeli and Lebanese leaders in “the near future”.

With the ongoing ceasefire between the US and Iran seeming fragile as the naval standoff between the two countries continued, Brent crude oil futures soared above $106 per barrel, rising around 18 per cent during the week. Conversely, the Indian rupee also extended its losses, falling to 94.29 against the US dollar, falling nearly Rs. 1.7 during the week.

Market experts warned that Indian bonds may remain volatile in the near-term as the Iran war nears its two-month mark, with crude oil prices expected to rise to $150 per barrel if the war extends till mid-May. Investors will watch out for the incoming inflation prints to assess the Reserve Bank of India (RBI) interest rate trajectory if oil shocks persist.

Additionally, investors also braced for the higher supply pressure of government bonds during the current financial year, which further cooled interest in the market. On April 24, the market absorbed Rs. 32,000 crore worth of government bonds.

Some experts also pointed out the existence of foreign portfolio investors (FPIs) from emerging market bonds as an additional reason for the rise in yields. Earlier in the week, a Reuters report said that RBI’s curbs on the foreign exchange market have prompted foreign investors to book profits in Indian bonds through the unwinding of hedged trades on bonds. This, along with investors trimming risks due to the geopolitical turmoil, has led FPIs to sell over Rs. 3,000 crore worth of bonds through the fully accessible route in April alone, data from Clearing Corp. of India showed.

“The three- to seven-year range of the yield curve offers the most favourable balance of yield and interest rate protection in our opinion. This segment allows you to capture a significant portion of the credit spread while minimising the price volatility associated with long-term maturities... I suggest doing it through debt mutual funds so that fund managers can manage the yields based on bond duration,” said Abhishek Kumar, a Securities and Exchange Board of India- Registered Investment Advisor (Sebi-RIA).