Indian government bonds recouped losses to end higher on Wednesday, after expectations for a U.S.-Iran peace deal cooled oil prices and spurred foreign-bank buying, as rate hike bets eased in swaps, traders said.
The benchmark 6.48% 2035 bond yield dipped 3.4 basis points to end at 7.0761%, easing the most in two weeks. Bond yields move inversely to prices.
Oil prices fell about 1% after U.S. President Donald Trump again said the Iran war would end "very quickly." Sentiment also got a lift from the exit of three supertankersfrom the Strait of Hormuz, carrying oil for Asian markets.
Consequently, the 10-year U.S. Treasury yield eased 5 basis points from intraday highs to around 4.64%, while benchmark Brent crude was down 2% at $109 a barrel from previous close.
Lower U.S. yields and oil spurred receiving interest in India's overnight index swaps, which eased 5-9 basis points across tenors, prompting buying from foreign banks, traders said.
"Traders are positioned very light, so any positive development can trigger sharp moves...a large part of which is linked to geopolitical developments," said Basant Bafna, head of fixed income at Mirae Asset Investment Managers (India).
India, which imports 90% of its oil needs, is highly vulnerable to oil swings and supply shocks.
The government has raised fuel prices twice in a week, increased import duties on gold and silver, and urged people to work from home and avoid travel to conserve fuel.
Some investors are also anticipating central bank rate hikes. Such bets were evident in the day's Treasury bill auction, where New Delhi raised about 240 billion rupees ($2.48 billion) through the sale of 91-, 182- and 364-day bills at yields sharply higher than expectations and at levels last seen in April-June 2025.
RATES
The one-year swap ended at 6.21%, while the two-year rate settled at 6.4650%. The five-year rate closed at 6.8%.
