MUMBAI: Indian government bonds fell on Thursday, with the 10-year reversing nearly half of its biggest rally in four years, as oil rose on doubts over the U.S.-Iran ceasefire and shipping disruptions through the Strait of Hormuz.
The benchmark 6.48% 2035 bond yield ended at 6.9601%, up from 6.8984% on Wednesday, when it posted its sharpest one-day decline in nearly four years. Bond yields move inversely to prices.
Israel bombed more targets in Lebanon on Thursday, putting the Middle East ceasefire in further jeopardy. There was also no sign Iran had lifted its blockade of the Strait of Hormuz, which has caused the worst disruption to global energy supplies in history.
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Tehran said there would be no deal as long as Israel was striking Lebanon.
Brent crude rose nearly 4% to around $98 a barrel after falling as low as $90 following the ceasefire announcement on Wednesday.
Prolonged disruption in Hormuz or a renewed flare-up in the war risks pushing up imported inflation, weakening the rupee and forcing investors to reassess how much room the Reserve Bank of India has to support growth, traders said.
The worry now is whether the RBI may have to think about rate hikes earlier than expected, not only because of fresh inflation pressures from the war but also to limit currency weakness, said Suyash Choudhary, chief investment officer for fixed income at Bandhan Mutual Fund.
The benchmark bond also saw selling pressure ahead of a sale on Friday, when New Delhi will auction 340 billion rupees ($3.67 billion) of the benchmark paper.
Rates
Overnight index swaps rose slightly after a sharp fall in the previous session.
The one-year OIS ended at 5.8625%, while the two-year rate rose 3.5 basis points to end at 6.06%.
The liquid five-year climbed 5.5 basis points to 6.3850%.
American Dollar Exchange Rate