Indian government bonds extended their decline on Tuesday as a spike in oil prices and a rise in US Treasury yields weighed on local debt markets. The benchmark 6.94% 2036 bond yield was expected to trade in a range of 6.68% to 6.73%, according to Reuters, after closing near 6.70% in the previous session. Since bond yields move inversely to prices, that range implies weaker prices for the securities.
What's Driving the Selloff?
The trigger for the latest move was geopolitical. The US launched strikes against Iran following attacks on commercial vessels in the Strait of Hormuz, a critical chokepoint for global oil shipments. Washington also revoked a general license that had authorized Iranian crude sales, further tightening the screws on Tehran's oil exports. The developments sent crude prices sharply higher, as oil jumped 2.7% on the news.
Higher oil prices are a concern for bond markets because they feed into inflation expectations. When energy costs rise, businesses and consumers face higher expenses, which can push overall inflation higher. That, in turn, can keep central banks from cutting interest rates—or even force them to raise rates—making existing bonds with fixed payouts less attractive.
At the same time, US Treasuries sold off, pushing the 10-year Treasury yield to 4.5650%, a level that often acts as a magnet for global bond yields. As Treasury yields hit four-week highs, investors compare returns across markets, and higher US yields can pull capital away from emerging-market debt like Indian bonds.
Foreign Buying Provides a Buffer
Despite the headwinds, the broader picture for Indian bonds is not entirely bearish. Reuters noted that the 10-year Indian bond yield has finished higher only twice in the last eleven sessions, suggesting that the selloff has been relatively contained.
One key reason is steady foreign buying. Since the start of June, overseas investors have net purchased 362 billion rupees ($3.81 billion) of Indian government securities through the Fully Accessible Route (FAR). The FAR is a channel that allows foreign institutions to buy certain Indian bonds without the usual investment limits, making it easier for global funds to allocate to Indian debt.
These inflows are also being driven by expectations that Indian bonds will soon be included in Bloomberg's Global Aggregate Index, a widely followed benchmark for bond investors. Index inclusion typically triggers a wave of buying from fund managers who track the index and need to hold the securities in proportion to their weight in the benchmark.
What It Means for Investors
For everyday investors, the interplay between global shocks and local demand matters because it affects the returns on bond holdings and the broader cost of borrowing in the economy.
The FAR inflows are not just any foreign money—they are often "benchmarking" flows, meaning they are driven by index rules and a desire to avoid drifting too far from a benchmark, rather than by daily macro headlines. That type of demand tends to be relatively price-insensitive, so it can act as a stabilizing force when global shocks—like higher oil and a rising US 10-year yield—push Indian yields up.
In practice, this means the 6.94% 2036 bond can still move with the US 10-year, but any drawdowns on risk-off days may be smaller and shorter-lived than they would be without those foreign flows. For investors holding Indian bonds, that provides some comfort, but it does not eliminate the risk entirely.
Looking ahead, the key factors to watch are oil prices, US Treasury yields, and the pace of foreign buying. If Middle East tensions escalate further, oil could push even higher, adding to inflation fears and keeping pressure on bonds. On the other hand, if the US economy shows signs of slowing, Treasury yields could ease, taking some pressure off Indian debt. And if index inclusion materializes, the steady stream of foreign buying could continue to support prices.
For now, the market is in a tug-of-war between global headwinds and local demand, and the outcome will determine whether Indian bonds can hold their ground or give way to further losses.
