Indian government bonds fell for a third straight session on Thursday as escalating tensions in the Middle East drove crude oil prices closer to $100 a barrel, while higher U.S. Treasury yields also weighed on sentiment.
The benchmark 6.94% 2036 bond yield ended at 6.8413%, its highest in a month, after closing at 6.8012% on Wednesday. The yield has climbed about 5 basis points over the last three sessions.
Brent crude futures rose for a fifth consecutive session, briefly approaching $99 a barrel in Asian trade, their highest level in seven weeks, as the widening conflict in the Middle East fuelled concerns over disruptions to global energy supplies.
Brent has rallied 12% this week after surging 16% last week, as U.S. strikes on Iran entered a 12th consecutive night, heightening concerns over further disruptions to regional energy supplies after the closure of the Strait of Hormuz.
For India, the impact is especially significant, as the nation imports nearly 90% of its crude oil needs, making it highly exposed to external supply shocks and price spikes.
A sustained rise in crude prices would likely widen India's import bill, worsen the current-account position, add pressure on the rupee and revive inflation risks.
"Fiscal stimulus and a higher subsidy burden have increased the risk of higher issuance and weighed on demand... The risk of a food-price spike due to El Nino should keep rate-hike risks alive and weigh on duration demand," BofA Securities said in a note.
RATES
India's overnight index swap (OIS) rates moved higher for a fifth straight session, absorbing the impact of oil and Treasury yields.
The one-year swap rate ended at 6.04%, while the two-year rate closed at 6.23%. The most liquid five-year rate settled at 6.53%.
