Flattening yields on Indian bonds; clues to be found in Friday's debt auction

20 Jul 2023 , 12:39 PM

The benchmark yield on Indian government bond yields traded little changed, hovering around important technical levels, as traders look for new debt to identify additional directional cues. Meanwhile, the main attention is still on the U.S. Federal Reserve’s interest rate decision next week.

At 10:00 a.m. IST, the benchmark 2033 bond yield of 7.26% was trading at 7.0776% after closing the previous session at 7.0769%.

On Friday, New Delhi will sell bonds to generate 310 billion rupees ($3.78 billion), including a new 14-year note. Traders anticipate the cutoff yield to be in the area of 7.13%-7.18%.

According to traders, aggressive bidding may prompt wagers on a greater decline in rates the following week.

Bond yields have decreased over the past three sessions, following changes in overnight indexed swap (OIS) rates and their American counterparts.

On growing rumours that the Fed’s rate hike on July 26 will be the final one in the current tightening cycle, U.S. rates and Indian swaps declined. The five-year OIS yield was at 6.21%, while the 10-year U.S. yield was around 3.75%.

The likelihood of a 25 basis point (bps) increase is still about 96%, but the likelihood of an additional increase has significantly decreased.

If the Fed signals an end to its current tightening cycle, bond yields may drop much further, pushing the benchmark 10-year yield below 7%, according to Vikas Goel, managing director and chief executive at PNB Gilts.

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