India bond yields fall tracking US Treasuries on soft economic data

MUMBAI: Indian government bond yields fell on Wednesday, mirroring U.S. Treasury yields, as investors bet that more soft U.S. economic data will raise the prospects of Federal Reserve rate cuts.

The 10-year benchmark 6.48% 2035 bond yield ended at 6.7088%, down for the second session, after settling at 6.7246% on Tuesday. Bond yields rise when prices fall.

U.S. nonfarm payroll (NFP) data for January is due after Indian market hours and is crucial to gauge the Fed’s interest rate trajectory.

The 10-year U.S. Treasury yield dropped on Tuesday after a round of data suggested the economy may be softening. The 10-year yield was at 4.1348%, down 12 basis points from this week’s high.

Weaker NFP data may nudge U.S. yields lower, with Indian yields likely to follow, traders said.

Investors are also awaiting India’s inflation print, due Thursday, where the annual consumer inflation rate likely rose for a third consecutive month to 2.4% in January, per a Reuters poll.

This will be the first month of the new 2024-based data series, and the first time since last August that inflation may slip back within the 2%-6% target band.

The Reserve Bank of India raised its inflation projection for the current fiscal to 2.1% from 2.0% at its February meeting, but left the repo rate unchanged, reinforcing bets that the rate-cut cycle may be over.

“If inflation (in India) undershoots projections, there is still scope for a 25-bp rate cut,” said Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank.

Overnight indexed swaps also signal that the rate-cut cycle is over, anchoring short-term rates, while longer-tenor rates are being lifted on expectations of firmer inflation and robust growth.

Rates

India’s OIS rates ended marginally higher. The one-year OIS rate and the two-year rate ended around 1 bp higher at 5.5225% and 5.67%, respectively.

The five-year OIS rate ended at 6.14%.