MUMBAI: Indian government bond yields are expected to climb on Wednesday, with the benchmark bond yield set to test levels seen before the budget announcement, as Treasury yields jumped after an uptick in inflation further pushed back rate cut hopes.
India’s benchmark 10-year yield is expected to fluctuate in the 7.10-7.16% range, following its previous close of 7.0998%.
“This is exactly what traders were fearing, and with the 10-year US yield hitting the 4.30% mark, there should be a gap-up opening for Indian bond yields, as the global scenario can definitely be not ignored despite favourable local fundamentals,” the trader said.
US yields climbed on Tuesday, with the 10-year yield breaking the crucial level of 4.20% by a large margin. The 10-year yield had been protected since the December Federal Reserve policy, which had a dovish tilt.
The US inflation reading came in above estimates, rising 0.3% last month after gaining 0.2% in December.
In the 12 months through January, the consumer price index increased 3.1%, against 3.4% in December.
Economists polled by Reuters had forecast the CPI would gain 0.2% on the month and 2.9% on a year-on-year basis.
As a result, the bets on near-term rate cuts have been pushed back further after the data, with the odds for cuts in May falling further, and most investors looking at the June meeting for the start of rate cuts.
India bond yields rise as traders cautious before US inflation data
The market is pricing in less than 100 bps of cuts for the year, and “we think that US yields are now closer to fair value, rather than overly rich, which was the case at the start of the year,” DBS Bank said in a note.
India’s retail inflation print touched 5.10% in January, in line with estimates and down from 5.69% in December.
Last week, the Indian central bank left interest rates unchanged, and reiterated its commitment to meet its 4% inflation target.
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