Indian government bonds see rally today: What's the reason?
What's the story
Indian government bonds witnessed a major rally at the start of the week today, recovering from last week's losses. The surge was triggered by a sharp fall in crude oil prices after US-Iran strikes were paused over the weekend. The development has raised hopes for a diplomatic resolution to the ongoing conflict and provided immediate relief to India's bond market.
Market response
Yield on benchmark bonds falls
As of today, the benchmark 6.94% 2036 bond yield was at 6.7767%, down from Friday's closing level of 6.8253%.
"Easing crude prices have provided immediate relief to bonds, and bulls are taking the maximum advantage of this," a trader with a primary dealership said.
He further added that this could also be short-lived, considering recent trends in the market.
Oil market
Brent crude prices dip below $93 per barrel
Brent crude prices fell 4% in the last session and extended losses by another 4% in Asian trade today, dipping below $93 per barrel.
This comes after a ceasefire between the United States and Iran following two weeks of hostilities.
The truce has raised hopes that shipping through the Strait of Hormuz could gradually return to normalcy, further stabilizing global oil markets.
US economy
US Treasury yields ease ahead of Fed meeting
The decline in oil prices is expected to ease inflationary pressures on the US economy and provide greater policy flexibility to the Federal Reserve ahead of its interest rate decision on Wednesday.
Interest rate futures have assigned a 66% probability of maintaining the status quo at this meeting, with a rate hike widely expected in September.
Meanwhile, the 10-year Treasury yield eased to 4.64%.
Indian market
India benefits from easing oil prices
Easing oil prices also benefit India, a major importer of crude.
Higher energy costs would have expanded the import bill, fueled domestic inflation, and worsened the current-account balance. This could have pushed up odds of monetary tightening.
In early trades today, India's overnight index swap rates plunged as traders unwound their recent aggressive paid positions with one-year swap rate at 5.89% and two-year rate at 6.10%.