Bond yields rise tracking U.S. peers on hawkish Fed stance


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MUMBAI — Indian government bond yields were higher on Thursday, tracking a spike in U.S. yields after the Federal Reserve hiked interest rate by 75 basis points and signaled more increases to battle elevated inflation.

The benchmark Indian 10-year government bond yield was at 7.2744% as of 0445 GMT. It had ended at 7.2326% on Wednesday.

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“As most of the reaction was already priced in, we saw another five basis points move, but yields should stabilize now, with the 10-year yield not crossing 7.30% handle unless any fresh negative trigger comes up,” a trader with a private bank said.

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The U.S. Treasury yield curve inversion deepened further, as Fed Chair Jerome Powell said central bank officials were “strongly resolved” to bringing down inflation from four-decade highs and “will keep at it until the job is done.”

On Wednesday, the benchmark 10-year U.S. Treasury yield jumped to 3.64%, its highest level since 2011, while the two-year yield hit a fresh 15-year high of 4.13% on Thursday. The spread was at 58 basis points.

The Fed fund futures were pricing in nearly a 70% probability of a fourth straight 75-bps hike in November. The Fed has raised rates by 300-bps in March-September.

Focus now shifts to the Reserve Bank of India’s policy decision due on Sept. 30, with many market participants expecting the RBI to hike rates by 50 bps.

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India’s headline retail inflation has remained above the central bank’s upper tolerance band for eight months.

The central bank has raised interest rates by a total of 140 basis points between May and August, with economists now assessing the possibility of terminal repo rate in 6.25%-6.50% band.

Market are expected to also watch out for banking system liquidity, which slipped into deficit for the first time in nearly 40 months this week.

Banking system liquidity is likely to remain in deficit in the second half of this financial year as credit growth picks up and the circulation of currency notes rises, analysts said. (Reporting by Dharamraj Lalit Dhutia; Editing by Neha Arora)

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