Government bond yields end flattish; focus turns to inflation data

Indian government bond yields began the week on a flattish footing, with the benchmark 10-year yield holding near 6.85 after the latest US data did little to build bets of aggressive rate cuts, while the focus shifted to twin inflation reports.

The benchmark 10-year yield ended at 6.8546 per cent on Monday, compared with its previous close of 6.8542 per cent.

US yields fell on Friday but recouped most of the decline and moved higher in Asian hours after the latest jobs data came in stronger than expected to make the case for a larger interest rate cut by the Federal Reserve next week.

Non-farm payrolls rose by 142,000 jobs last month after it was downwardly revised to an 89,000-rise in July. Economists polled by Reuters forecast payrolls would increase by 160,000 jobs.

The unemployment rate fell to 4.2 per cent, from 4.3 per cent the prior month.

Many foreign brokerages including Nomura, Capital Economics and Barclays expect the Fed to cut rates by 25 basis points next week, while the odds for a 50-bps reduction remain around 30 per cent.

"However, markets continue to price in 100 bps of cuts in 2024, with a more aggressive 50-bps cut in November," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.

"We maintain the view of 75 bps of Fed rate cuts over the next three FOMCs as overall economic activity in the US is still holding up well. The Fed speeches following the NFP data further corroborated the need for easing, but not an aggressive one."

Investor focus has shifted to retail inflation data in India and the US, both due this week.

Indian consumer inflation probably held below the Reserve Bank of India's 4.0 per cent medium-term target for a second month in August with the reading at 3.50 per cent, a Reuters poll of economists showed.