Indian bond rally seen extending on weaker oil, Treasury yields

Indian government bonds are poised to continue their recent upward trend on Tuesday, buoyed by a significant drop in crude oil prices and declining U.S. Treasury yields, although investors remain wary of the upcoming U.S. midterm elections. The benchmark 6.94% 2036 bond yield is expected to hover between 7.28% and 7.33%, according to a private bank trader.

The 10-year yield has decreased by around 12 basis points over the past three trading sessions. There is optimism about bond purchases, with more potential for fresh investments, the trader noted. Crude oil prices plummeted over 7% on Monday, driven by talks between Iranian and Qatari officials that increased hopes for an end to the U.S.-Iran conflict and stabilization of Middle East oil supplies.

These discussions took place amidst fears that the war might reignite following the U.S. midterm elections on November 3. President Donald Trump assured that the United States would not launch new attacks on Iran before the vote and described the talks with Tehran as productive, though he did not rule out military action afterward.

Market participants are closely monitoring the elections, which will decide if Republicans maintain control of Congress during Trump's final two years in office or cede majority control to Democrats. Polls indicate that Democrats may regain control of the House of Representatives and possibly the Senate. Brent crude finished below $105 per barrel on Monday and maintained this level in Asian trading on Tuesday.

In the meantime, longer-dated U.S. Treasury yields softened on Monday as falling oil prices eased inflation concerns, providing further support for emerging-market debt. Overnight indexed swap rates in India may keep their recent downward trajectory. On Monday, the one-year OIS fell by 6.25 basis points to 6.6575%, the two-year decreased by 7.25 basis points at 6.6750%, and the five-year settled 8.75 basis points lower at 6.7750%.