MUMBAI: Indian government bond yields jumped in the early session on Wednesday, tracking their U.S. peers, as bets of a larger Federal Reserve rate hike later in the month rose.
The 10-year benchmark 7.26% 2032 bond yield was trading at 7.4562% as of 10:00 a.m. IST, after closing at 7.4262% on Monday. Indian markets were shut on Tuesday for a local holiday.
“The way U.S. yields have reacted, especially at the shorter end, we expect selling pressure to remain on Indian government bond yields until the next set of economic data,” a trader with a state-run bank said.
India bond yields tad down as US peers crash
Treasury yields rose on Tuesday, with the 10-year yield near the 4% mark, while those of the two-year bonds, a closer indicator of interest rate expectations, traded above the 5% handle to around their highest levels in nearly 16 years.
The yield curve inversion between the two-year and 10-year deepened to over 100 basis points (bps), a level last seen in 1981.
Fed Chair Jerome Powell indicated the U.S. central bank will likely need to raise interest rates more than expected in light of recent strong data and is prepared to take bigger steps to control inflation.
Fed funds futures are now pricing in a more than 62% chance of a 50 basis points hike at the bank’s March policy meet, while the market has fully factored in an additional 100 bps increase in the coming months.
“Although the March FOMC (Federal Open Market Committee) decision remains data dependent, Chair Powell’s Senate testimony increases the likelihood that the committee will hike 50 bps in March and signal a higher peak,” Barclays said in a note.
While the Fed has raised rates by 450 bps to 4.50%-4.75% over the last year, a further aggressive increase could force the Reserve Bank of India (RBI) to follow suit.
Meanwhile, the RBI will auction Treasury Bills worth 390 billion rupees ($4.75 billion) later in the day.
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