India Bond Yields Set to Climb as Oil and US Rates Pressure Sentiment

Indian government bonds are bracing for another round of selling pressure in early trade on Wednesday, as elevated crude oil prices and a sharp jump in US Treasury yields continue to dampen investor appetite.

The yield on the benchmark 6.94% 2036 bond is expected to move within a range of 6.94% and 7.00%, according to a trader at a private bank. The yield closed at 6.9452% in the previous session, its highest level since June 5. Market participants believe that a breach of the 7% mark on the 10-year yield is now increasingly likely.

Oil prices have extended their gains, with Brent crude hovering near $96 per barrel, its highest in almost six weeks. The rally follows overnight strikes between the US and Iran, which have raised concerns about supply disruptions and dimmed hopes for a quick de-escalation. The attacks also threaten to restrict traffic through the Strait of Hormuz, a vital waterway that carried roughly one-fifth of global oil supplies before the conflict.

For India, a large importer of crude, persistently high energy prices could worsen the inflation trajectory and put additional strain on government finances.

Meanwhile, US Treasury yields have climbed to levels not seen in nearly three years. Market expectations for a 25-basis-point rate hike by the Federal Reserve later this month have risen to 68%, up from around 41% a week ago, according to the CME FedWatch tool. The shift follows a speech by Fed Chair Kevin Warsh at Jackson Hole, where he indicated that the central bank may need to raise rates if inflation does not move closer to its 2% target.

In the derivatives market, India's overnight indexed swap rates are expected to hit fresh highs. The one-year swap rate ended at 6.0150% on Tuesday, while the two-year swap closed at 6.21%. The five-year rate settled 2 basis points higher at 6.5050%.