Indian government bond prices started the quarter with gains on Wednesday as hopes of Bloomberg index inclusion and improved liquidity offset pressure from elevated U.S. yields and firmer oil prices after new hurdles emerged in U.S.-Iran peace talks.
The benchmark 6.94% 2036 bond yield was down 1 basis point at 6.7403% at 11:10 a.m. IST, versus Tuesday's close of 6.7501%.
Traders waited for Bloomberg Index Services' decision on whether to add Indian Fully Accessible Route (FAR) bonds to its flagship index.
FAR bonds have drawn strong front-running foreign inflows on expectations of inclusion in Bloomberg's Global Aggregate Index, DBS Bank said.
Foreign investors bought a record 299 billion rupees ($3.16 billion) of FAR bonds after New Delhi and the central bank unveiled measures in June to attract foreign capital and support the rupee.
Liquidity conditions also improved, swinging to a surplus of 1.12 trillion rupees on Tuesday after staying in deficit for a week.
Globally, markets turned cautious after Iran said on Tuesday it would not meet senior U.S. envoys visiting the region after a flare-up in hostilities, clouding prospects for a durable peace deal.
U.S. Treasury yields rose about 5 basis points to 4.47% in Asian trade, while oil climbed 0.4% to $73.21 a barrel.
"Unless the Indian 10-year bond yield breaks decisively below 6.75% and closes there, we do not expect a sharp rally from here," a private bank trader said.
Trader said optimism will be measured by monsoon rains and the durability of the war key for sustained rally.
RATES
India's overnight index swaps traded indecisively, with traders awaiting fresh triggers.
The one-year rate was little changed at 5.76%, while the two-year rate was flat at 5.8950%. The five-year rate gained 2.25 bps to 6.19%. ($1 = 94.6600 Indian rupees)
