Yields cool off as Fed’s dovish stance boosts sentiment

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Updated: August 31, 2021 8:09 AM

Traders had the appetite for securities, as the Reserve Bank of India's governor in his recent interview also signalled a pro-growth focus which provided comfort to the market.

BSEMarket participants said sentiment improved after Powell said that the reduction in asset purchases programme would not be intended to carry a direct signal regarding the timing of interest rate lift-off.

After a dovish speech at Jackson Hole by Federal Reserve Chair Jerome Powell, yield on the 10-year benchmark bond fell almost 3 basis points on Monday on improved sentiments. Traders had the appetite for securities, as the Reserve Bank of India’s governor in his recent interview also signalled a pro-growth focus which provided comfort to the market. Additionally, the firm response at the weekly bond auction and the absence of devolvement in the past few auctions supported the market on Monday.

The 10-year benchmark 6.10%-2031 bond yield ended at 6.2249%, as against 6.2539% close on Friday. “The market was bullish today as there was no negative surprise from the Fed’s Chair and RBI governor’s comment in a recent interview to television stated that there will be no sudden shock or any sudden surprises to the market,” a dealer with a state-owned bank said.

Market participants said sentiment improved after Powell said that the reduction in asset purchases programme would not be intended to carry a direct signal regarding the timing of interest rate lift-off. The Fed is likely to begin cutting the bond purchases before the end of the year if economic progress continued. However, a specific time to cut the $120 billion a month bond-buying programme was not given. Powell expressed caution about employment and said that inflation was hovering around Fed’s 2% target.

Meanwhile, the bond market also got comfort from the comments by the RBI governor in a recent interview with CNBC. “Throughout the pandemic, the RBI has surprised the market in a positive sense, by announcing measures from time to time and responding to the evolving challenges very proactively. So, throughout the pandemic, there have been very pleasant surprises for the market. We are fully conscious and will not try to make any changes which take the market by surprise… We don’t want to give any sudden shock or any sudden surprises to the markets,” Shaktikanta Das said.

Additionally, the demand from investors has been seen improving as has been evident in the last few aucitons. Also, the devolvement in auctions has reduced, the last devolvement has taken place on July 30, while on August 6 the central bank has rejected all bids on 10-year bonds at a weekly bond auction.

Market participants expect that the yield benchmark bond to trade in a thin range ahead of the announcement of Q1 GDP data. “We continue to expect the 10-year paper to remain in the 6.20-6.30% as markets await the 1QFY22 GDP data. We expect the 1QFY22 GDP at 21.7% yoy aided largely by strong favourable base effect,” said Upasna Bhardwaj, senior vice president, Kotak Mahindra Bank, said in a report.

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