MUMBAI: Indian government bond yields tracked US peers lower on Thursday, with the benchmark bond yield hovering around a crucial technical level after inflation in the world’s largest economy grew at a slower-than-expected pace.
Still, a rise in domestic inflation capped any major fall in local bond yields, traders said.
The benchmark 7.26% 2033 bond yield was at 7.0790% as of 10:00 a.m. IST, after ending the previous session at 7.1160%.
As expected, the easing of US inflation is leading to a larger reaction in bonds, dragging the yields to a key support level, a trader with a state-run bank said.
“But it would be very difficult for yield to cross that level as local inflation seems to be turning unfavourable.” US yields dropped on Wednesday after inflation data raised expectations that the Federal Reserve is nearing the end of its interest rate-hiking cycle.
The Fed had paused in June but indicated two more raises in 2023.
The odds of a 25-bps hike on July 26 remain around 89%, but that of another one have come down.
Inflation registered its smallest annual increase in more than two years, having risen 0.2% last month for an annual gain of 3.0%.
Indian bond yields dip as 10-year US yield falls below 4%
The 10-year yield eased 12 basis points to trade around 3.85%, sharply below key levels, the break of which would have led to a sharp surge.
“We believe Fed will go ahead with a July 23 rate hike and stay on pause for rest of 2023,” said Deepak Agrawal, CIO- fixed income at Kotak Mahindra Asset Management.
Back home, surging food prices accelerated India’s June retail inflation rate to 4.81%, snapping four months of easing and higher than both the revised 4.31% for May and 4.58% expected in a Reuters poll.
Meanwhile, the benchmark Brent crude contract rose above $80 per barrel for first time in over two months and could also add to inflationary pressures as India is one of the largest importers of the commodity.
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