Indian bonds battered by global debt rout, oil rally

Mumbai: Indian government bonds plunged on Wednesday, with the benchmark 10-year yield briefly surpassing 7% for the first time in three months, as a worsening global debt selloff and a surge in oil prices unsettled investors. The yield on the benchmark 6.94% 2036 bond rose 3 basis points to 6.9883% as of 10:30 a.m. IST, briefly hitting 7% at the market open and nearing a three-month peak.

The decline followed a reassessment of inflation, fiscal burdens, and geopolitical risks globally, fueled by escalating US-Iran tensions and the ongoing closure of the Strait of Hormuz, a critical oil transit route. The US 10-year Treasury yield climbed to 4.81% in Asian trading, its highest level since November 2023, while Japan's 10-year yield touched 3% for the first time since 1996, and German and UK yields reached their highest levels in over 15 years.

Higher yields in developed markets diminish the return advantage of emerging-market debt and may prompt foreign capital outflows. A trader at a private bank predicted that the Indian 10-year yield could climb to around 7.15% in the near term if US yields keep rising. Brent crude prices surged above $95 a barrel during Asian trading hours, marking the highest level in about six weeks, following fresh US-Iran attacks.

As a major global oil importer, India is particularly susceptible to a prolonged oil shock, which could inflate domestic prices and strain government finances. Elevated oil prices and global yields have also heightened expectations of tighter monetary policy, increasing the likelihood of a 25-basis-point Federal Reserve rate hike this month, which was previously at 41%, according to CME FedWatch.

Hawkish statements from US and domestic central banks have bolstered the belief that the Reserve Bank of India may opt for earlier tightening, with HSBC forecasting two 25-basis-point RBI increases in the fiscal year 2027, bringing the repo rate to 5.75%.