Indian government bond yields are expected to rise in the early session on Thursday, tracking a sharp spike in U.S. peers, as minutes of the latest Federal Reserve meeting reiterated more interest rate hikes would be needed. The benchmark 7.26% 2033 bond yield is expected to be in the 7.11%-7.15% range after ending the previous session at 7.1072%, a trader with a primary dealership said.
“Since the U.S. yields have broken key levels and are testing fresh upside, there would be similar reaction in local bond yields, with the possibility of 7.15% today or tomorrow,” the trader added. U.S. yields jumped on Wednesday after the release of a softer-than-expected data on U.S.-made goods and the minutes from the Fed’s June policy meeting.
A united Fed agreed to hold interest rates steady last month, even as the vast bulk expected they would eventually need to tighten policy further, according to meeting minutes released on Wednesday. Investors will also gauge a flurry of data on the labour market on Thursday and Friday, which will help shape the Fed’s aggressiveness in tightening monetary policy.
The Fed had raised rates by 500 basis points in 10 consecutive meetings from March 2022 to May 2023, before pausing in June. The odds of an increase in July have now risen to around 85%. Although officials might be eyeing a final rate hike in September, Capital Economics said that more marked signs of a slowdown in both core inflation and the real economy will ultimately persuade the Fed to hold.
Market participants expect Indian bond yields to rise further in this quarter amid heavy debt supply and diminishing chances of a rate cut before the first half of next year. India plans to raise 4.47 trillion rupees ($54.28 billion) through bond sales between July and September, with 390 billion rupees on Friday. Meanwhile, state-run banks are likely to turn more cautious in their government bond purchases amid rising yields but will continue to increase their exposure at a more gradual pace.