India bonds climb in step with Treasuries as oil sinks

Democrats pledged on Wednesday to use their decisive midterm victory to rein in President Donald Trump, raising the prospect of two years of political gridlock in Washington. Investors see that as reducing the risk of more disruptive policy outcomes and potentially opening a path towards a resolution of the Iran war.

Brent crude retreated to $94 a barrel from a pre-midterm peak of nearly $120, while the 10-year US Treasury yield has fallen nearly 10 basis points to 4.84%.

Indian government bonds increased for the fourth consecutive session following a Democratic win in the US midterm elections. This victory led to a decline in crude oil prices, easing inflation concerns for India. The 10-year US Treasury yield also fell significantly, impacting investors' expectations. A trader noted that upcoming inflation data would be critical for assessing the Reserve Bank of India's rate outlook.

The benchmark 6.94% 2036 bond yield was down 6 basis points at 7.1258% by 1 p.m. IST (0730 GMT), taking its fall over four sessions through Thursday to about 29 basis points.

Indian government bonds were among emerging Asia's worst performers in October, with the benchmark 10-year yield testing 7.50% for the first time in four years. The yield has risen 45 basis points since the war began in February.

The market's focus has now shifted to whether the Democratic victory alters the course of the US-Iran war and crude's trajectory, both of which could reshape expectations for the Reserve Bank of India's policy path.

"Inflation data next week will be crucial in gauging the RBI's rate outlook and determining whether the bond rally can extend," a private-bank trader said.

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

"Easing of geopolitical risk premiums and crude oil prices, alongside lower tariff uncertainty and a softer dollar, could offer some relief to external balances and currency stability," said Madhavi Arora, chief economist at Emkay Global Financial Services.

Rates

The one-year OIS rate fell 11 bps to 6.3950%, the two-year rate slid 10.75 bps to 6.4% and the five-year rate dropped 10.75 bps to 6.5%.