Bond yields rise as debt auction sees weak demand; dip on weekly basis

The overall sentiment remained weak because of hawkish commentary from central bankers across the world, which dimmed the hopes of domestic interest rate cuts later in 2023, said a dealer at a bank

Indian government bond yields ended higher on Friday after weaker than expected demand at the weekly debt auction turned investors more cautious. The benchmark 10-year yield ended at 7.2768 per cent, after closing at 7.2676 per cent on Thursday. The yield fell 2 basis points this week, after rising 8 bps last week.

The overall sentiment remained weak because of hawkish commentary from central bankers across the world, which dimmed the hopes of domestic interest rate cuts later in 2023, said a dealer at a state-run bank.

Further, the auction saw long-term investors such as pension funds, life insurance companies and banks push cut-off yields on new 14-year paper higher, leading to some sell-off at the longer-end of the curve, the dealer said.

Bond yields had surged on Thursday after the U.S. Federal Reserve Chairman Jerome Powell said the central bank will continue hiking rates in 2023. The Fed has hiked rate by 425 basis points (bps) in this year, and is projected to push it beyond 5 per cent in 2023.

"The Fed indicated that it was likely to keep rates higher for longer, while for India, the trajectory of domestic inflation will be the key variable for bond markets going ahead," said Puneet Pal, head-fixed income at PGIM India Mutual Fund.

The Reserve Bank of India (RBI) has hiked the interest rate by 225 bps to 6.25 per cent this year. With core inflation staying above the RBI's 6 per cent target, it may be forced to opt for another 25 bps hike in February, according to economists. "The union budget will be the next major trigger," Pal said, adding that until then the 10-year benchmark bond yield is likely to trade in a range of 7.20 per cent to 7.50 per cent.

India's fixed income investors should wait for the union budget announcement before getting into longer duration government bonds, after which the 7.40 per cent level for the benchmark yield would be an attractive entry point, said Rahul Singh, vice president and senior fund manager of fixed income at LIC Mutual Fund.

He expects the benchmark bond yield to trade in the 7.20 per cent-7.40 per cent range until March.

(Reporting by Bhakti Tambe; Editing by Dhanya Ann Thoppil)