Indian government bonds fell sharply at the start of the month, pushing the benchmark yield towards 7.00% as U.S. Treasury yields jumped after fresh military escalation between Iran and the United States.
The yield on the benchmark 6.94% 2036 bond was at 6.9559% as of 10:00 a.m. IST on Tuesday, after closing at 6.9452% on Monday. It earlier rose to 6.9653%, its highest since June 8.
"Rising U.S. Treasury yields and the escalation in geopolitical risk have dealt a fresh blow to Indian bonds. With the benchmark yield approaching 7.00%, market appears vulnerable to further selling pressure unless global rates retrace meaningfully," trader with a primary dealership said.
U.S. forces struck two Iranian missile launchers, prompting retaliatory attacks on U.S. personnel in Jordan.
The seven-month conflict has kept oil prices high, raising inflation concerns and expectations of tighter monetary policy.
The U.S. 10-year Treasury yield topped 4.75% on Monday for the first time since January 2025 and rose further in Asian trade.
According to CME FedWatch, the probability of a 25-basis-point Fed rate increase later this month has risen to 66%, from roughly 41% a week earlier.
The repricing followed Federal Reserve Chair Warsh's Jackson Hole remarks, in which he said the central bank could need to raise rates if inflation fails to move back toward its 2% target.
The benchmark Brent crude held near $91 a barrel, adding pressure on major oil importers such as India.
Meanwhile, the country's economy grew 7.8% on-year in April-June, above the 7.1% estimate in a Reuters poll, adding to the potential for the Reserve Bank of India to move towards tightening.
RATES
India's overnight indexed swap rates moved marginally higher in a shallow-volume session.
The one-year swap and the two-year swap were not yet traded, while the five-year rate was 3 basis points higher at 6.51%.
