Indian government bonds ended lower after a choppy session on Tuesday, with profit booking triggering the biggest spike in the 10-year yield in over two weeks, while rising U.S. yields added to the caution.
The benchmark 6.94% 2036 bond yield rose 1 basis point to 6.6958%, snapping a three-session falling streak and rising the most in a day since June 19. Bond yields move inversely to prices.
Traders said 6.68% is being viewed as a near-term exit level, triggering some profit booking.
Tensions in the Middle East escalated after two tankers were hit in the Strait of Hormuz and Iran said there would be no more peace talks unless Donald Trump halted his repeated threats to restart the war.
Brent crude futures gained 1.3% to $72.92/barrel, while the yield on the U.S. 10-year bond rose 2 bps to 4.4971% in Asian trade.
"There is some caution in the market because of rising U.S. yields and a slight rise in oil, plus liquidity needs to improve for further buying," said Debendra Kumar Dash, senior vice president of treasury at AU Small Finance Bank.
Strong foreign inflows and improved monsoon rainfall in Indiahave, however, limited the rise in yields.
India's cumulative rainfall deficit narrowed to 24% below the long-period average as of July 5, from 43.1% on June 28, Barclays said in a note.
"Any upside in yield is likely to be capped around 6.70%, where buying interest should re-emerge," a private bank trader said.
Indian bonds have drawn 351 billion rupees ($3.70 billion) in net foreign inflows since June 5, supported by tax breaks, the addition of longer-tenor notes under the Fully Accessible Route and expectations of inclusion in the Bloomberg Global Aggregate Index inclusion.
RATES
India's overnight index swaps fell, led by receiving interest from foreign banks, traders said.
The one-year swap rate ended at 5.73%, while the two-year rate closed at 5.87%, both marginally down. The five-year rate pared 1.75 bps to 6.1175%.
