Freshly struck coins fall into a container after minting in the Swiss Confederation Swissmint in Bern. (Photographer: Michele Limina/Bloomberg)

Bond Rally in India Fizzles as Oil Spike Stokes Inflation Fears

(Bloomberg) -- The bears didn’t take long to reappear. The rally in Indian bonds barely lasted a week after Prime Minister Narendra Modi’s government pulled out all the stops to revive a market that had sold off for seven months.

Sovereign debt fell for a fourth day Wednesday as focus returned to concern that rising oil prices may once again prompt the central bank to turn hawkish. The losses have wiped out most of the gains sparked by measures aimed at reducing supply and luring buyers.

“The escalation in geopolitical tensions has led to a spike in oil and that’s fueling concerns about inflation and fears about a rate hike by the central bank,” said Harish Agarwal, a fixed-income trader at FirstRand Bank Ltd. in Mumbai.

Bond Rally in India Fizzles as Oil Spike Stokes Inflation Fears

While a surge in Brent oil to above $70 a barrel is bad news for a nation that imports about three-quarters of its oil, that’s not the only reason to explain the reversal in sentiment. Two factors that had weighed on investors before the recent rally -- an oversupply of debt from the states and poor demand from banks -- continue to linger, according to AU Small Finance Bank.

State lenders, the biggest holders of sovereign debt, were net sellers in seven of the past ten days, taking their average daily withdrawals this year to 6.7 billion rupees ($102 million), data from the Clearing Corp. of India show.

“All bets will be off if the 10-year yield closes above 7.49 percent,” Vijay Sharma, executive vice president for fixed-income at PNB Gilts Ltd., said before trading ended.

Benchmark yield did just that, climbing 16 basis points to 7.54 percent at the close. It has risen 41 basis points in four days, erasing most of 50-basis point drop in five days through April 5.

Bonds did pare losses briefly after Cogencies reported on its Twitter feed that India is considering selling $4 billion of sovereign debt. India’s Finance Ministry denied any such move, sending prices lower again.

©2018 Bloomberg L.P.