Fresh selloff on cards for India bonds as oil, Treasury yields see persistent spike

Indian government bonds face another selloff on Wednesday, as surging oil prices and higher US Treasury yields dampen investor confidence. The 6.94 per cent 2036 bond is anticipated to trade between 6.94 per cent and 7.00 per cent, following its previous session close of 6.9452 per cent, the highest since June 5. "Bulls are in a cautious zone, and 7 per cent on the 10-year yield now looks inevitable," remarked a private bank trader.

Oil prices surged on Tuesday, with Brent crude extending gains in Asian trading hours due to escalating concerns over supply disruptions following the US and Iran's exchange of strikes. The benchmark crude hovered near $96 per barrel, its highest in nearly six weeks, as tensions between the two nations escalated, potentially restricting traffic through the Strait of Hormuz, a vital waterway that carries around one-fifth of global oil supplies.

Elevated energy prices impact major importers like India, as persistent rises could exacerbate the country's inflation trajectory and government finances. US Treasury yields also climbed, with the 10-year reaching levels last observed nearly three years ago. Market predictions on the possibility of a 25 basis point increase by the Federal Reserve later this month have risen to 68 per cent, up from approximately 41 per cent a week ago, according to the CME FedWatch tool.

This shift followed Chair Kevin Warsh's Jackson Hole speech, where he suggested the Fed might need to hike rates if inflation does not decrease toward its 2 per cent target.

India's overnight indexed swap rates are projected to hit new highs. On Tuesday, the one-year swap rate closed at 6.0150 per cent, while the two-year swap settled at 6.21 per cent. The five-year rate increased marginally to 6.5050 per cent.