Bond yields to remain stable ahead of state debt auction

Government bond yields are anticipated to remain relatively steady on Tuesday as traders await a new supply of debt through state bond sales. 

The benchmark 10-year yield is projected to fluctuate in the range of 7.16 per cent to 7.20 per cent, following its previous close at 7.1790 per cent on Friday, according to a trader from a primary dealership.

On Monday, foreign exchange, bond, and money markets were closed. The lack of major triggers in the market, coupled with elevated US yields, is expected to limit actions. 

The trader noted that the demand for state debt during the auction could provide insights into investor appetite.

Indian states are aiming to raise Rs 24,280 crore ($2.92 billion) through a bond sale, marking the highest amount in over two months and slightly exceeding the scheduled amount. 

Following this, the government will conduct a bond sale, raising Rs 33,000 crore, including Rs 16,000 crore from benchmark papers.

US yields experienced a slight easing on Monday ahead of key economic data that could influence the Federal Reserve's monetary policy decision next week. 

However, the 10-year US yield remained above 4.10 per cent, with investors adjusting their expectations for the timing and pace of rate cuts by the Fed in 2024 following strong economic data in recent days.

The odds of the first Fed rate cut by March have been trimmed to 43 per cent from 81 per cent on January 12, and the probability of a 150 basis points cut in 2024 has dropped to 47 per cent from 91 per cent during the same period, according to the CME's FedWatch Tool.

Market participants are also looking ahead to the Union Budget for the next financial year, scheduled for February 1. 

The government is expected to target a reduction in the fiscal deficit as a percentage of GDP to 5.30 per cent in 2024-25, down from 5.90 per cent in the current fiscal year ending March 2024, according to a Reuters poll.

(With Reuters Inputs)