Bond market outlook: Fed's hawkish turn may pull Indian Gsec lower

Benchmark 6.94 per cent 2036 yield seen at 6.85-6.90 per cent after US rate-hike signals lift Treasury yields

Indian government bonds could open Thursday’s session with a declining bias after the US Federal Reserve turned hawkish, with most members anticipating the start of an interest rate-hiking cycle before the end of the calendar year.

 

The yield on the benchmark 6.94 per cent 2036 note is likely to move between 6.85 per cent and 6.90 per cent, according to a trader with a private bank. It closed at 6.8626 per cent on Wednesday. Yields move inversely to bond prices.

 

“Though nothing on rates was expected, the tone of the new governor was particularly very hawkish, which was not anticipated, and which led to a strong reaction in the shorter end of the Treasury yield curve,” the trader said.

 

 

The Fed held interest rates steady, but policymakers expect a hike in borrowing costs later this year amid growing concerns that inflation will remain sticky above the Fed’s 2 per cent target.

 

New quarterly projections showed that nine Fed officials anticipate a rate hike over the next six months. An updated policy statement also removed language that had signalled the likelihood of further reductions.

 

The two-year Treasury yield jumped to its highest level in almost four months, a move that may spill over to Indian rates and add to recent pressure on Indian yields.

 

Crude and flows

 

The benchmark Brent crude contract stayed below $80 per barrel in Asian hours, with markets awaiting more details on the US-Iran peace deal and the reopening of the Strait of Hormuz, which Iran has effectively blocked since the war began on February 28.

 

India imports about 90 per cent of its crude oil requirements, and a sustained fall in prices could ease inflationary pressure and support the rupee. That would also help the central bank’s efforts to attract dollar inflows.

 

Foreign investors have injected around $2.2 billion into domestic bonds over the last nine sessions since the Reserve Bank of India (RBI) announced measures to attract dollar inflows on June 5. It was reported earlier that the RBI and the central government’s capital-inflow package was aimed at drawing foreign capital amid the West Asia crisis.

 

India’s overnight index swap rates may see a reversal of recent declines, especially at the shorter end of the curve, in line with Treasury yields. The one-year swap rate ended at 5.88 per cent, while the two-year rate ended at 6.04 per cent. The five-year rate settled at 6.2950 per cent. 

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