Indian government bonds rose on Monday after a sharp decline last week, as sentiment improved following the U.S. Federal Reserve Chair’s hint at an interest rate cut next month.
The benchmark 10-year bond yield was at 6.5422% as of 10:00 a.m. IST, after ending at 6.5510% on Friday. The yield jumped 15 basis points last week, its biggest rise in over three years.
Bond yields move inversely to prices.
“Had it not been for fiscal slippage fears, the 10-year bond yield could have easily touched 6.50%, but because of a lack of clarity, bulls are not going all out,” a trader with a primary dealership said.
U.S. yields sank on Friday after Fed Chair Jerome Powell alluded to a possible interest rate cut at the central bank’s policy meeting next month, saying that risks to the job market were rising. However, Powell also noted inflation remained a threat and that a decision was not set in stone.
After Powell’s comments, bets of a 25-basis-point rate cut in September rose to nearly 90%, according to the CME FedWatch Tool.
Meanwhile, the domestic market remains concerned about the proposed cuts to India’s Goods and Services Tax (GST), including moving to a two-rate structure of 5% and 18%, scrapping the 12% and 28% rates.
A state ministers’ panel has backed the new structure, further fuelling fears of fiscal slippage that could nudge the government to undertake additional borrowing.
The GST council will meet on September 3-4 to discuss these changes.
India’s overnight index swap rates eased amid thing trading volume, tracking a decline in Treasury yields.
The one-year OIS rate was not yet traded after ending at 5.5250% on Friday. The two-year OIS rate and the liquid five-year OIS rate were 2 bps lower each at 5.46% and 5.72%.