Indian bond yields seen little changed, higher US yields hurt

Indian government bond yields are likely to trade largely unchanged in the early session on Wednesday, while elevated U.S. yields continue to weigh on sentiment. The 10-year benchmark 7.26% 2033 bond yield is expected to be in the 6.99% to 7.03% range after closing at 7.0144% in the previous session. Since Tuesday, the focus has shifted to U.S. Treasuries and therefore the market has seen some correction in local bonds, a trader said.

“With such U.S. rates, it is difficult for the 10-year bond yield to fall below 7%, he added. U.S. yields eased marginally on Wednesday, but remained around two-month high levels around the 3.70% mark as traders monitored the progress of the U.S. debt ceiling talks.

Representatives of President Joe Biden and congressional Republicans ended another round of negotiations with no signs of progress as the deadline to raise the government’s $31.4 trillion borrowing limit ticked closer. Yields have also been rising as multiple Federal Reserve officials have struck a hawkish tone in their comments towards inflation and interest rates, leading traders to price in a higher chance of a rate hike in June.

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The odds of a 25 basis point rate (bps) hike in June have now risen to 30%, against nearly 5% at the start of the month.The Fed has raised rates by 500 bps since March 2022 to 5.00%-5.25%.Still, market sentiment may remain supported, as India’s retail inflation is expected to drop further in May, after declining to its lowest level in 18 months in April when the reading stood at 4.7%.

Nomura expects inflation to fall to around 4.2% in May, with core inflation also easing below 5%. “Base effects alone are likely to lower May headline inflation by ~0.2pp, but the remainder should be due to lower momentum. Within the fuel basket, lower subsidized kerosene prices should help.”