Indian government bonds rallied early Friday, lifted by a sharp decline in oil prices after U.S. President Donald Trump revived hopes of a breakthrough, boosting demand ahead of the weekly debt auction. Brent crude futures eased nearly 2% to $88.66 per barrel in Asian trade, the lowest intraday level since April 7, after President Donald Trump on Thursday said the United States and Iran could sign a peace deal as soon as this weekend that would reopen the Strait of Hormuz.
India is the world's third-largest oil importer, making its economy and assets highly vulnerable to price swings.
The 10-year U.S. Treasury yield also eased over 7 basis points on Thursday and hovered little changed in Asian hours.
The yield on the benchmark 6.94% 2036 note pared 2.6 basis points to 6.8978% by 12:00 p.m., its lowest since issuance in May. Yields move inversely to bond prices.
"The 10-year yield could head toward 6.70% in the near term, as markets remain upbeat on foreign inflows, though volatility may persist due to oil-price swings," a trader with a private bank said. Market sentiment is upbeat since the central bank announced measures last week to attract foreign inflows, support the rupee, and strengthen external balances.
Focus is also on fresh debt supply, with New Delhi set to raise 320 billion rupees ($3.34 billion) through a bond sale via 5-year and 40-year bonds. Demand for the five-year 6.36% 2031 bond is expected to stay strong, with its yield down nearly 30 bps since the Reserve Bank of India's policy decision on June 5. Foreign investors have also lapped up more than $500 million of this paper.
India's overnight index swaps eased as oil plummeted, boosting sentiment.
The one-year swap fell 4.5 bps to 5.9775%, while the two-year rate dropped 5 bps to 6.1450%. The more liquid five-year rate shed 5.75 bps to 6.37%.
($1 = 95.7500 Indian rupees)
