Indian bonds gain as soft US inflation cools Fed rate hike bets

MUMBAI: Indian government bonds rose in early deals on Wednesday, after a soft inflation print in the world’s largest economy eased concerns of an immediate rate hike by the Federal Reserve.

The benchmark 6.94% 2036 bond yield was at 6.7703% as of 10:40 a.m. IST, after ending at a three-week high of 6.7945% in the previous session.

Bond yields move inversely to prices.

US Treasuries rose, with the 10-year yield easing below the 4.60% handle after relief from softer-than-expected inflation data. Consumer prices rose less than forecast in June, prompting markets to scale back expectations of near-term Fed hikes.

The probability of a 25-basis-point rate increase at the July meeting fell to 17% from 42%, per CME Group’s FedWatch tool.

For September, markets priced in a 60% chance of a hike, down from 75.1% on Monday.

“Bonds were in an oversold zone after yesterday, and some reversal was on the cards, and with rising chances of a delay in the Fed’s rate hike cycle, we could see the yield easing below the 6.75% mark soon,” a trader with a private bank said.

Markets largely ignored a further rise in oil prices after US President Donald Trump re-imposed a naval blockade on all Iranian ports and Iran struck US infrastructure in the region.

Higher oil prices worsen India’s inflation as the nation is the third largest importer of crude.

Retail inflation in June rose 4.38%, breaching the Reserve Bank of India’s target for the first time in 17 months, but some brokerages have trimmed their rate hike calls as they expect inflation for the fiscal year will average below the central bank’s estimates.

Bets that Indian debt would be included in Bloomberg’s Global Aggregate Index cushioned market sentiment.

Foreign investors have channelled about $4.2 billion into bonds under the so-called fully accessible route since June 1.