Indian government bonds plummeted early on Tuesday, as fresh strikes in the Gulf obstructed shipping through the Strait of Hormuz, yanking oil higher and triggering a global debt selloff.
U.S.-Iran fighting stretched into a third night after a fragile ceasefire collapsed, with both sides reinstating rival blockades of the strait once again.
Brent crude climbed 9.6% overnight, its biggest jump in more than six years, and added 1.9% in Asian trade to be at $84.84 per barrel.
India's benchmark 6.94% 2036 bond yield climbed 6 basis points to 6.7864% as of 10:55 a.m. IST, hovering near a three-week peak. The rupee dropped 0.54% to 96.14 per dollar.
Short-end U.S. Treasury yields rose to 17-month highs on rate-hike expectations ahead of a crucial inflation report due after Indian market hours. The U.S. 10-year Treasury yield hit a two-month high.
For India, which imports about 90% of its oil, higher crude prices threaten to raise inflation, lift interest-rate risks, widen the import bill and strain government finances.
India's retail inflation breached the central bank's target in June for the first time in 17 months, accelerating to 4.38%, led by higher fuel and food costs.
Foreign investors, who have recently returned to the bond market, sold 1.3 billion rupees on Monday, their first sale since India announced policy measures in June to backstop the rupee.
"Oil is back as the dominant risk for India assets, and is weighing on the rupee and bonds. The key question now is whether foreign investors will keep chasing Indian bonds once the Bloomberg index decision is out," a private-bank trader said.
Bloomberg Index Services' decision on whether to include Indian debt in its flagship index is expected soon, traders said.
RATES
War-driven rate-hike bets pushed Indian swap rates sharply higher.
The one-year rose 8 bps to 5.91%, while the two-year surged 11.5 bps to 6.0825%. The most liquid five-year swap rate jumped about 12 bps to 6.3525%.
