Benchmark yields soften as inflationary pressures ease

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November 09, 2021 2:30 AM

The benchmark 6.10%-2031 bond yield, which was trading at 6.3874% last week, has now come down to 6.3006% at the close on Monday.

The yield on 10-year US Treasury notes fell nearly 6 basis points to 1.46%.The yield on 10-year US Treasury notes fell nearly 6 basis points to 1.46%.

Yields on benchmark securities have fallen by 8 basis points over the last few days, with over 5-basis points reduction witnessed on Monday, as investor sentiment improved after the government cut excise duty on fuel and a sharp fall in US Treasury yields. The benchmark 6.10%-2031 bond yield, which was trading at 6.3874% last week, has now come down to 6.3006% at the close on Monday.

“Cutting the duty on fuel was a great relief and will keep the problems of inflation worries at a distance now. Crude also improved and yields in the western market fell taking comfort from Fed tapering, which was on the expected lines,” said Ajay Manglunia, MD and head – institutional fixed income at JM Financial.

The central government, on the eve of Diwali, had reduced excise duty on petrol and diesel by Rs 5 and Rs 10, respectively. This was followed by most states, which cut VAT on petrol and diesel. The government statement has stated the crude oil prices had witnessed a surge globally and domestic prices of petrol and diesel increased, which exerted inflationary pressures.

Bond dealers expect that the move by the central government will impact nearly 13-15 basis points on the CPI inflation in the December data. Meanwhile, yields on US Treasury notes moderated sharply on Friday despite the stronger-than -expected October jobs report. The yield on 10-year US Treasury notes fell nearly 6 basis points to 1.46%.

Last week, the Federal Reserve announced the beginning of tapering of its bond purchases programme, which was expected by the market. It will reduce bond purchases by $15 billion per month, with Treasury purchases being reduced by $10 billion and mortgage-backed securities by $5 billion. Federal Open Market Committee has kept the policy rate between 0% and 0.25%.

“In the FOMC meeting last week, the Fed was less hawkish than the market expected. It lowered QE but pushed back on rate hike expectations. The market has sold off earlier on the fear of early rate lift-off, so now they are dialling back some of those expectations,” said Pankaj Pathak, fund manager, fixed income at Quantum Asset Management.

Market players are now expecting yields on benchmark securities to touch the 6.15-25% range this or next week because excise duty cut and benign global cues are expected to provide some support to the bonds ahead of the CPI inflation data. “Markets may continue to rally and the 10-year benchmark is likely to touch back to 6.15-20% levels in this or next week,” Manglunia added.

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