Bond Markets on Edge: Will 10-Year Yields Break the 7% Barrier as Crude Stays Elevated?
The Indian rupee and government bonds will remain sensitive to developments in the U.S.-Iran war, which has shaped the global macroeconomic outlook for more than two months and kept volatility levels elevated.
The rupee closed at 94.48 last week, managing to rise 0.4% week-on-week even as renewed U.S.-Iran hostilities grabbed investor attention and kept crude prices elevated.
Iran has sent its response to a U.S. proposal to begin peace talks to end the war, the IRNA news agency reported on Sunday. After some 48 hours of relative calm following sporadic clashes last week, hostile drones were detected over several Gulf countries on Sunday, underlining the threat still facing the region.
Fresh developments could spur another bout of swings in oil prices, which are expected to dictate momentum for global risk appetite in the near-term.
Elsewhere, upbeat U.S. job market data pushed up expectations that the U.S. Federal Reserve will hold rates steady through its December 2026 meeting.
In addition to developments in the Middle East, the focus this week will be on inflation from India and the U.S., with investors likely to also pay attention to cues from U.S. President Donald Trump’s visit to China.
India’s annual consumer inflation likely moved closer to the central bank’s 4% target in April as higher fuel costs following the U.S.-Iran war began feeding into prices, a Reuters poll of economists showed. Inflation stood at 3.40% in March.
“Retail gasoline prices (in India) are still capped, and core inflation remains contained. Instead, the main driver will be the second-round effects of higher oil prices on food inflation,” analysts at ING said in a note.
BONDS India’s 10-year benchmark bond ended at 6.9809% on Friday, down 3 basis points for the week, its first such decline in three.
Traders expect the yield on the note to move in a 6.90% to 7.05% range this week, largely focusing on movement in oil prices as well as the local inflation print.
Bond yields edged lower last week, tracking a decline in oil prices, but profit-booking by state-run banks helped set a firm floor.
Still, the benchmark Brent crude contract stayed above $100 per barrel, while the Strait of Hormuz, which typically handled about a fifth of global oil and liquefied natural gas flows prior to the war, also remained shut.
“The biggest risk for fixed-income market may emerge from longer than expected continuation of supply disruptions due to ongoing geopolitical conflicts,” said Sudhir Agrawal, a fixed income fund manager at SBI Mutual Fund.
“The continued stand-off may result in crude prices moving further higher, hence impacting current account deficit and subsequent impact on currency which in turn may result in fears of an interest-rate defence of currency.”
Activity from foreign investors will continue to remain under focus, as they have net bought bonds worth 133 billion rupees since the announcement of a ceasefire between U.S. and Iran.
(Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Ronojoy Mazumdar and Sherry Jacob-Phillips)
