Bond Yields Rise 5 Bps as Brent Crude Rises Above $100 a Barrel after Middle East Tensions

Indian government bond yields rose by approximately 5 basis points during the morning session of trading on March 12 after Brent crude oil prices rose above $100 a barrel following reports of attacks on ships in the region of the Strait of Hormuz.

The surge in oil prices has led to a sell-off in government bonds, causing yields to increase. Bond yields are inversely related to prices.

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Oil Prices Jump After Tanker Attacks

Global crude prices climbed sharply after reports that Iranian explosive-laden boats struck fuel tankers in regional waters, raising fears of supply disruptions across the Persian Gulf.

Brent crude was trading at around $100.80 per barrel after rising nearly 9% overnight, according to market data cited by financial media reports.

The surge came despite the International Energy Agency announcing on March 11 that its 32 member countries would release 400 million barrels of oil from strategic reserves in an effort to stabilise global markets.

Energy markets have remained volatile as tensions continue in the Middle East and concerns grow about disruptions to shipments through the Strait of Hormuz, one of the world’s most important oil transit routes.

Domestic Bond Market Reaction

The increase in oil prices prompted a sell-off in Indian sovereign bonds during the early session.

Higher crude prices can increase inflation expectations in India because the country imports a large portion of its energy requirements. So, an increase in inflationary expectations usually decreases the demand for fixed-income securities. As a result, yields tend to increase.

However, in the previous trading session, yields had eased slightly. Market participants had indicated that the Reserve Bank of India had intervened to support bond prices.

RBI Open Market Operation In Focus

Market participants are keeping an eye on a scheduled open market operation by the Reserve Bank of India.

The Reserve Bank of India is planning to conduct an open market purchase of government securities to the tune of ₹50,000 crore on March 13.

According to statements cited by market participants, the operation is intended to ensure adequate liquidity in the financial system and support orderly market functioning by purchasing selected government bonds.

Such operations allow the central bank to influence liquidity conditions and borrowing costs within the banking system.

Currency Market Impact

The rise in crude oil prices has also affected India’s currency market.

The Indian rupee opened weaker by nearly 30 paise and was trading around ₹92.34 per U.S. dollar after closing the previous session at ₹92.04.

Higher oil prices tend to increase India’s import bill, which can raise demand for the U.S. dollar and place pressure on the rupee.

The developments in the oil markets across the globe and geopolitical situations in the Middle East are impacting the bond markets as well as exchange rates in India.