Indian government bonds extended gains for a sixth straight session on Thursday as falling oil prices outweighed pressure from the U.S. Federal Reserve's hawkish outlook, pushing the benchmark 10-year yield near a more than three-month low.
Oil prices fell again after the United States and Iran released the text of an interim agreement aimed at ending the war, raising expectations that the Strait of Hormuz could reopen.
Brent crude futures fell 0.1% in Asian trade to $78.50 per barrel. The contract is now only about $6 above pre-war levels.
The yield on the benchmark 6.94% 2036 bond fell 2.4 basis points to 6.8387% on Thursday, down over 10 basis points in six sessions.
The bond rally showed investors were putting more weight on lower oil prices than on the Fed's hawkish signal, with cheaper crude improving India's inflation and fiscal outlook.
"Indian markets are responding positively to U.S.-Iran deal prospects, which have led to a sharp drop in crude oil prices, further aided by recent RBI measures to attract foreign flows," said Amit Modani, senior fixed income manager at Shriram AMC.
Indian bonds and the rupee had come under pressure in early trade after the Fed delivered a surprise hawkish tilt in its policy outlook, even as it kept rates unchanged. Nine of the 18 Fed policymakers pencilled in a rate hike, far more than analysts expected.
Traders also pointed to foreign buying, which helped reverse early losses. New Delhi's tax cuts and RBI reforms have drawn overseas investors to Indian debt, with foreign investors pouring more than $2.2 billion into government bonds this month.
RATES
India's overnight index swap rates showed caution, pricing in the risk of a hawkish Fed and a fragile U.S.-Iran truce.
The one-year swap rate was at 5.89%, while the two-year rate was at 6.0450%. The five-year rate was at 6.3225%. The rates rose 1.25-2.75 bps on the day.
