Indian bonds mirror gains in Treasuries as oil slips

Synopsis

Indian government bonds saw a modest rise on Thursday, reflecting trends in U.S. Treasury yields. Easing crude oil prices have lessened inflation fears, enhancing the bond market's optimism. Investors seem relieved about the likelihood of less aggressive interest rate increases from the Federal Reserve. With India's retail inflation landing below projected figures, there is increased bond activity.

Indian government bonds edged higher on Thursday, tracking U.S. Treasuries, as lower crude prices and waning expectations of further Federal Reserve rate hikes bolstered sentiment.

The benchmark 6.94% 2036 bond yield fell 2 basis points to 6.7582%. Bond yields move inversely to prices.

Brent crude futures fell ‌2% to $87.20 per ⁠barrel ⁠in Asian trade, easing after six sessions of rise. Investors weighed prospects of weaker global ​demand and higher U.S. crude inventories against supply risks from the stalled U.S.-Iran peace ​talks.

Lower oil prices are positive for India, the world's third-largest crude importer, as they ease imported-inflation and current-account pressures, improve the macroeconomic outlook and support ​lower bond yields.

Market sentiment was also aided ⁠by easing ‌concerns over further policy tightening in the United States ​and India ​after recent inflation data suggested both central banks may ⁠hold rates steady in the near future, traders said.

U.S. retail ​inflation rose 0.1% in July after declining in June, ​while annual inflation slowed to 3.4% from 3.5%. The data lowered the implied probability of a September Fed rate hike to 36%, according to CME FedWatch. The 10-year U.S. Treasury yield was last down 2 basis points at 4.67%.

India's retail inflation rose to 4.45% in ‌July from 4.38% in June, but came in below analysts' 4.5% estimate.

Overnight index swap rates also eased, supporting ​bond buying, traders ​said.

"Although the swap market ⁠is pricing in one RBI rate hike over the next six months, we expect the RBI to keep rates on hold," UBS said in ​a note.

Investors now await New Delhi's 320 billion rupee debt sale on Friday for further cues on demand.

RATES

The one-year rate fell 2 bps to 5.75%, the two-year rate dropped 3 bps to 5.93%, and the liquid five-year rate slipped 3.25 bps to 6.25%.

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