Updates at market close

By Khushi Malhotra

MUMBAI, May 18 (Reuters) - India's 10-year bond yield jumped to a nearly seven-week high on Monday, tracking a global debt selloff as markets braced for higher interest rates and weighed the economic fallout from an extended U.S.-Iran war and rising oil prices.

The benchmark 6.48% 2035 bond yield IN064835G=CC jumped to its highest level since April 2 to settle at 7.1313% versus Friday's close of 7.0644%.

Brent crude futures surged to a two-week high of $112 a barrel in Asian trade, their highest level since May 5, driven by bleak prospects for peace in the Middle East after a drone attack on a nuclear power plant in the United Arab Emirates.

Rising oil prices triggered a rout in global debt markets. The yield on the 10-year U.S. Treasury climbed to its highest level in a year at 4.6310% in Asian trade.

Indian bonds have increasingly tracked U.S. Treasury moves in recent years, as higher U.S. yields narrow the return premium on emerging-market debt, spur foreign outflows and pressure the rupee.

The rupee also hit yet another all-time low of 96.3875 to a dollar on Monday, ending 0.4% lower, which added to the pain for Indian bond investors.

Bond yields are now already factoring in a rise in policy rates, Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund said, adding that he expects policy rates to rise by 50-75 bps by the end of calendar year 2026.

"Given the lingering geopolitical issues in Middle East, constraining the central government’s fiscal position and with the state’s fiscal deficit expected to remain elevated, the supply demand dynamics remain unfavourable and we expect yields to keep trending higher gradually."

RATES

India's overnight index swap rates jumped 15-17 bps, pricing in imminent rate hikes.

The one-year swap INR1YMIBROIS=CC was settled at 6.31%, while the two-year rate ended at 6.55%. The five-year INR5YMIBROIS=CC rate closed at 6.85%.