Indian Bonds Slump as Fed Rate Hike Bets and Oil Prices Weigh

Indian government bonds declined on Monday, pushing the benchmark yield to its highest level in over two months, as expectations of a US interest rate hike next month and a jump in global oil prices dampened sentiment.

The yield on the 6.94% 2036 bond rose to 6.9480% by mid-morning trade, up from its Friday close of 6.9108%. During the session, the yield touched 6.9538%, a level not seen since June 11. Bond yields and prices move inversely.

Traders attributed the sell-off to a combination of factors, including a more hawkish stance from the US Federal Reserve and rising crude prices. "Sentiment has turned distinctly bearish as a more hawkish Fed, rising crude prices and the local central bank's readiness to act on inflation leave little room for yields to ease," a trader at a state-run bank said.

US Treasury yields rose sharply on Friday after Federal Reserve Chair Kevin Warsh indicated that the central bank would still "have work to do" if inflation was not moving sustainably toward its 2% target. His comments were interpreted as a clear signal that policymakers could consider rate increases if price pressures persist, boosting the probability of a September move to 60%, up from 35% before the remarks.

Adding to the pressure, Brent crude futures climbed above $90 a barrel in Asian trade following US strikes on Iran's Larak Island on Sunday. For India, a major oil importer, sustained high crude prices could worsen the inflation outlook and strain government finances.

Domestically, minutes from the Reserve Bank of India's August meeting showed policymakers remain prepared to raise interest rates if upside risks to inflation materialise.

In the derivatives market, India's overnight indexed swap rates rose sharply as traders priced in the possibility of a Fed rate hike next month. The one-year swap rate was at 6.02%, the two-year rate at 6.22%, and the five-year rate jumped 8 basis points to 6.52%.