West Asia tensions may keep bond yields elevated as oil surge fuels inflation fears: ICICI Bank

Escalating geopolitical tensions in West Asia are expected to keep bond yields under pressure in the near term as rising crude oil prices stoke inflation concerns and dampen investor sentiment, according to ICICI Bank.

The bank expects India's benchmark 10-year government bond yield to trade in the 6.65% to 6.85% range over the coming weeks, with developments in the US-Iran conflict likely to remain the key driver of debt markets.

“We expect geopolitical events to guide bond yields in the near term. We also expect industrial metals to trade sideways while bullion could remain under pressure as the market awaits inflation data,” said Anaga Deodhar, Senior Economist, Global Markets, ICICI Bank in a detailed note on Monday.

Global bond markets witnessed a broad sell-off during the week after the US launched a fifth round of attacks on Iran, targeting more than 160 locations over two days. The escalation heightened concerns over energy supplies, pushing investors to reassess inflation and interest rate expectations.

The US 10-year Treasury yield climbed to 4.56% from 4.46% at the start of the week. Yields also rose sharply across other advanced economies, with the UK, Germany, Canada and New Zealand witnessing increases of 8 to 17 basis points. Emerging markets also saw higher borrowing costs, with Indonesia, Turkey and South Africa recording notable increases in benchmark yields.

In India, government bond yields were initially supported by strong demand at the weekly debt auction. However, the positive sentiment faded as geopolitical developments intensified and crude oil prices surged.

The report noted that domestic macroeconomic indicators continue to remain supportive. Bank credit growth accelerated to a two-year high of 18.6% year-on-year in the fortnight ended June 30, driven by robust lending to infrastructure, engineering, construction, commercial real estate, trade and NBFCs. Deposit growth also improved to 13.3%, supported partly by stronger inflows into non-resident deposits.

Despite these strong domestic fundamentals, the rupee came under depreciation pressure amid rising oil prices, importer demand and purchases by oil marketing companies. Foreign capital inflows, however, helped cushion the currency's losses.

The pressure on bond markets came as crude oil prices rallied after the latest military escalation. Brent crude rose nearly 5% to touch almost $80 per barrel after the US strikes, while uncertainty deepened over the Strait of Hormuz. Although the US said the vital shipping route remained open, Iran claimed it had been closed, raising fears of potential disruptions to global oil supplies.