Bond yields inch up before Fed decision, December outlook in focus

Indian government bond yields edged up in thin trading volumes on Wednesday, as traders remain cautious ahead of the U.S. Federal Reserve’s much-awaited monetary policy decision later in the day.

The benchmark 10-year bond yield was at 7.4176%, as of 0455 GMT. The yield had ended five basis points lower at 7.3957% on Tuesday.

“Trading volumes are so low, that any firm judgement cannot be taken, and hence we are seeing yields oscillating in a very narrow range,” a trader with a private bank said.

The Fed is widely expected to raise interest rates by 75 basis points (bps) for the fourth consecutive time but its outlook and commentary on future increases will be crucial for the market, especially after recent U.S. data pointed to a still strong economy, dampening expectations of a policy pivot. [

The next meeting of the Fed will take place in mid-December. The Fed funds futures are pricing in an 87% chance of a 75-bps hike later in the day, with only a 50% chance of a same-sized increase in December, according to CME Group’s FedWatch tool.

The 10-year U.S. yield stayed just above 4% mark but the two-year yield has risen above 4.50% handle again, after the U.S. jobs opening data.

Meanwhile, foreign investors sold bonds worth nearly $500 million on Friday and Monday, with the so-called “fully accessible route,” or FAR bonds bearing the brunt of a selloff.

They sold a net 41.1 billion Indian rupees ($497.05 million) of bonds, of which more than 80% accounted for securities exempt from restrictions under FAR for foreign investors.

Traders are also awaiting the outcome of the Reserve Bank of India‘s Thursday meeting that, will most likely discuss the central bank’s response to the government after failing to meet its inflation target for three quarters in a row.

The Reserve Bank of India will auction Treasury Bills worth 220 billion rupees later in the day.

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