India bonds climb in step with Treasuries as oil sinks

Indian government bonds gained for a fourth straight session on Thursday, moving in line with US Treasuries. The rally followed a Democratic sweep of the US midterm elections, which pushed crude oil prices lower. That is good news for India, the world’s third-largest oil importer, because cheaper crude eases inflation worries and reduces the chance of further rate hikes.

Politics in Washington

Democrats said on Wednesday that they would use their decisive midterm win to check President Donald Trump. That raises the prospect of two years of political gridlock in Washington. Investors see this as lowering the risk of more disruptive policy moves. It may also open a path towards ending the Iran war.

Oil and US yields

Brent crude fell back to $94 a barrel, down from a pre-midterm peak of nearly $120. The 10-year US Treasury yield dropped by nearly 10 basis points to 4.84%.

Domestic bond moves

The benchmark 6.94% bond maturing in 2036 was down 6 basis points at 7.1258% by 1 pm IST (0730 GMT). Its yield has fallen about 29 basis points over the four sessions through Thursday.

Indian bonds had a difficult October. They were among the weakest performers in emerging Asia that month, and the benchmark 10-year yield touched 7.50% for the first time in four years. The yield has risen 45 basis points since the war began in February.

What comes next

The market’s attention has now moved to whether the Democratic victory changes the course of the US-Iran war and the direction of crude prices. Both could reshape expectations for the Reserve Bank of India’s policy path.

A trader at a private bank said inflation data due next week will be crucial in judging the RBI’s rate outlook and whether the bond rally can continue.

The RBI raised rates by 25 basis points at its October policy meeting. It expects inflation to peak at 6% in the October-December quarter.

Madhavi Arora, chief economist at Emkay Global Financial Services, said that easing geopolitical risk premiums and crude prices could offer some relief to India’s external balances and currency stability. She added that lower tariff uncertainty and a softer dollar could also help.

Swap market

Overnight indexed swaps extended their slide as traders unwound aggressive bets on rate hikes. The one-year OIS rate fell 11 basis points to 6.3950%. The two-year rate slipped 10.75 basis points to 6.4%, and the five-year rate dropped 10.75 basis points to 6.5%.