It was a case of the market reeling on 13 July 2026. A hardening of the US-Iran stance and the approach of $80 for Brent put the focus back on rates and inflation before the June numbers come out. There was also a risk-off mood in play after some jitters in US Treasuries.
The early part of the day was quiet but made its point. You could see the 10-year benchmark yield go from 6.7139 to 6.7368 percent. By 10:25 a.m. IST, the 6.94% 2036 paper was at 6.7340%. Some of the selling was held in check by the talk of a Bloomberg index spot.
Oil shock raises inflation risk
In Asian trade, Brent futures were up 4% to $79 a barrel following some new posturing between the US and Iran. Even as the US insisted the Strait of Hormuz was open, Iran’s claim it had been shut down was enough to stoke fears of supply hiccups and the kind of inflation that comes from abroad.
Locally, the fuel pass-through and a weak monsoon are on the radar. When the June CPI is released later, the consensus is it will be 4.3%, up from 3.93% in May. That would be the first time in 16 months the central bank’s 4% medium-term goal is left behind.
Domestic rates react to global spillover
Gilts came under pressure in line with a softer tone overseas. The 10-year US Treasury was 1.6 bps higher at 4.5834%, which only added to the bear-steepening you can see in Asia.
You can see the same in the swaps. The 1-year OIS was 5 bps up to 5.82% on Friday, the 2-year 4.75 bps to 5.9650%, and the 5-year, the most liquid of the bunch, 4.5 bps to 6.2125%. It was in step with offshore paying and the price of oil.
Then again, Friday was a breather for a while; the 10-year gave back nearly 4 bps to 6.7139% in the best showing of the week. Monday’s about-face was a reminder of how fast an oil story can change the duration game.
Foreign demand and index hopes provide a floor
Even with the oil headline, the book is not one-sided. Overseas have put over $1 billion into government securities via the fully accessible route in July, no small feat given the policy environment and tax setup.
All told, foreign capital in those bonds is over $4 billion. One private-bank trader put it this way: yields should find their level once the initial reaction has run its course, with the Bloomberg Global Aggregate Index in mind.
A word from Bloomberg Index Services is due any day. If there is any headway, it could bring in more buyers and calm things down, even if the rupee is firm and home-grown inflation is a touch high.
What to watch next
The curve and the flows will be driven by a few key items in the short term. This is on the list:
– The June CPI, coming up today
– Where Brent is and what is happening in the Hormuz
– Any word on the Bloomberg index
– The 10-year US side of the house
The takeaway
There is a tug-of-war in the bond market right now between an oil-fuelled jolt and the longer-term pull of index inclusion. With the 10-year at 6.7368 and Brent at $79, the next inflation read may well tell us if we are in for some buying or a bit of a hold pattern.
