Bond yields to hold steady amid traders' cautious outlook

The government bond yields are expected to trade largely unchanged in the early session on Tuesday as traders await a fresh supply of debt from states, while the recent rise in yields will keep them cautious.

The benchmark 7.26 per cent 2033 bond yield is likely to be in the 7.15 per cent - 7.19 per cent range after ending the previous session at 7.1746 per cent, a trader with a state-run bank said.

The yield rose for a second consecutive month in July and is now up by an aggregate of 19 basis points in June-July.

States aim to raise 195 billion rupees ($2.37 billion) through the sale of seven-year to 30-year bonds, with the amount being largely in line with the calendar.

"Market is eyeing 7.20 per cent on the benchmark this week, and till then, we do not expect any major bullish move to catch in," the trader said.

Positive outlook on bond yields in coming months

Local bond yields have been rising rose tracking a spike in US yields, with the 10-year paper crossing the 4 per cent mark, and still hovering around that level.

Even as the market believes that the Federal Reserve's rate hiking cycle is done, there is a broad consensus that rates will remain elevated for a longer period, which has further strengthened the bears. The odds of a rate hike in September are just 20 per cent.

Back home, traders continue to worry that local inflation is expected to rise sharply in July, which could force the Reserve Bank of India (RBI) to opt for a hawkish stance in the upcoming monetary policy review on Aug. 10.

HDFC Bank expects the benchmark bond yield to trade in the 7.10 per cent - 7.25 per cent range in the near term, with the balance of risks tilted towards the higher end of the range.