Indian bonds battered by global debt rout, oil rally

Indian government bonds plummeted on Wednesday as a global debt selloff and a surge in oil prices unsettled investors. The benchmark 10-year yield briefly spiked above 7% for the first time in three months, breaching the threshold for the first time since March. The yield on the 6.94% 2036 bond rose to 6.9883%, nearing a high not seen in over three months.

This sell-off came after a reassessment of inflation, fiscal strain, and geopolitical risks following heightened US-Iran tensions and the partial closure of the Strait of Hormuz. The US 10-year Treasury yield climbed to 4.81% in Asian trading hours, the highest since November 2023. Similar trends were observed in Japan, Germany, and the UK, where yields reached their highest levels in over a decade.

Higher yields in developed markets diminish the edge of emerging-market debt and may trigger foreign capital outflows. If US yields continue to climb, Indian 10-year yields could inch closer to 7.15% in the near term, according to a private bank trader. The spike in Brent crude oil prices above $95 a barrel also fueled concerns of a prolonged oil shock, which could stoke inflation and strain government finances.

The possibility of tighter monetary policy has become more likely, with the probability of a 25-basis-point Fed rate hike this month rising to 68%, up from 41% a week earlier. Market participants now foresee two 25-basis-point RBI rate hikes in fiscal year 2027, pushing the repo rate to 5.75%. Indian overnight indexed swaps experienced significant upward pressure, with the one-year rate increasing by 3 basis points to 6.0450% and the two-year rate climbing by 5 basis points to 6.26%.