Bonds seen boxed in narrow range as traders eye fresh triggers

Indian government bonds are anticipated to fluctuate within a narrow range on Tuesday as heightened oil prices and Treasury yields exert downward pressure on investor sentiment. Traders at a private bank anticipate the yield on the benchmark 6.94% 2036 bond to oscillate between 6.94% and 6.98%, following its previous closing at 6.9607%.

The reserve bank's liquidity management measures are expected to continue constraining the benchmark bond yield within a shallow trading range of 3 to 4 basis points, barring significant shifts in global conditions. The Reserve Bank of India (RBI) will execute an overnight variable rate reverse repo on Tuesday, a move following the withdrawal of over 6 lakh crore ($52.92 billion) from banks via overnight and 30-day VRRR channels.

The RBI has been utilizing reverse repos to facilitate banks in depositing surplus funds with it, as the banking system's liquidity has reached record levels due to substantial deposit inflows from the diaspora. Persistent large liquidity surpluses could potentially fuel inflation and elevate financial asset prices. The central bank recently suggested the possibility of rate hikes amid rising inflation and economic growth.

Meanwhile, oil prices have surged, with the benchmark Brent crude contract staying above $97 per barrel, following the intensifying military conflict between the U.S. and Iran, which has heightened concerns about prolonged supply disruptions. Elevated energy costs pose challenges for large importers like India, potentially exacerbating inflationary pressures and impacting government finances.

The 10-year U.S. bond yield is around 4.78% in Asian trading, with the market speculating on a 25-basis point increase by the Federal Reserve next week. India's overnight indexed swaps are projected to remain within a confined range, with the one-year rate at 5.9750%, the two-year rate at 6.17%, and the five-year rate at 6.4625%.