Indian Government Bonds Face Selloff Pressure Amid Rising Oil Prices and US Treasury Yields

MUMBAI — Indian government bonds are poised for another round of selling in early trading sessions, pressured by rising global crude oil prices and higher US Treasury yields that continue to weigh on investor sentiment.

According to market participants, the yield on the benchmark 6.94 per cent 2036 bond is expected to trade in the 6.94 per cent to 7.00 per cent range. In the previous session, the bond closed at 6.9452 per cent, marking its highest close since June 5. A trader at a private bank noted that market bulls remain in a cautious zone, with a 7 per cent yield on the benchmark now appearing inevitable.

The pressure on domestic debt follows recent developments in global energy markets. Oil prices rose as benchmark Brent crude extended gains during Asian trading hours. The increase stems from mounting concerns over supply disruptions after the United States and Iran exchanged strikes overnight, diminishing hopes for a quick resolution to the conflict.

Brent crude hovered around $96 per barrel, reaching its highest level in nearly six weeks following the latest escalation. These developments raise concerns about potential restrictions on traffic through the Strait of Hormuz, a critical maritime passage responsible for transporting approximately one-fifth of global oil supplies prior to the conflict.

As a major importer of energy, India remains vulnerable to elevated oil prices. A sustained increase in crude rates threatens to adversely impact the country's inflation trajectory and government finances.

Concurrently, US Treasury yields experienced a sharp upward movement, with the 10-year yield climbing to levels not seen in nearly three years. Market expectations regarding US monetary policy have also shifted significantly. Data from the CME FedWatch tool indicates that market wagers for a 25 basis point rate hike by the Federal Reserve later this month have risen to 68 per cent, up from approximately 41 per cent a week earlier.

This shift followed remarks made by Federal Reserve Chair Kevin Warsh during his Jackson Hole speech, where he indicated that the central bank may need to implement further rate hikes if inflation fails to moderate toward its targeted 2 per cent level.

Reflecting these broader macroeconomic pressures, India’s overnight indexed swap rates are projected to climb to fresh highs. During the previous session, the one-year swap rate settled at 6.0150 per cent, the two-year swap closed at 6.21 per cent, and the five-year rate finished two basis points higher at 6.5050 per cent.

"External macroeconomic shocks, such as surging crude oil prices and rising US Treasury yields, have an immediate transmission effect on domestic bond yields and borrowing costs. For businesses and financial markets in India, navigating this period requires close attention to inflation trajectories and central bank policy adjustments. Elevated energy import costs and shifting global interest rate expectations underscore the importance of maintaining robust fiscal and financial strategies during periods of external volatility." — Dr. Shishir Gupta, Founder & CEO, StartupLanes