Government bond yields to rise following uptick in US peers

Government bond yields are expected to increase in early session on Friday, tracking an upward trend in US yields, after inflation rose moderately, while focus will now shift to the debt supply.

The benchmark 7.26 per cent 2033 bond yield is likely to be in the 7.14 per cent-7.18 per cent range till the debt auction, after ending the previous session at 7.15 per cent, a trader with a state-run bank said.

"There was a rally yesterday as the central bank's monetary policy was not as hawkish as feared, but there can be some reversal today as the 10-year US yield is back above 4.10 per cent," the trader said. "Major action would depend on auction demand and the cutoff of the new paper."

The government aims to raise Rs 330 crore ($3.99 billion) through the sale of bonds later in the day, including Rs 140 crore of a new 10-year paper.

The new paper will replace the existing benchmark in the coming weeks. It is unlikely to see a massive premium over the existing benchmark bond, as per traders.

RBI monetary policy 

Bond yields were lower on Thursday, after the Reserve Bank of India (RBI) held the lending rate steady at 6.50 per cent for the third straight meeting, while undertaking temporary liquidity draining steps.

The central bank raised the inflation forecast for the quarter. RBI Governor Shaktikanta Das said that past trends point that vegetable prices may witness significant correction after a few months.

While retail inflation in the US advanced marginally and has not materialised into major bets of another rate hike, chances are that the Fed may maintain higher rates for longer period, as per traders.

Headline and core consumer prices climbed by 0.2 per cent in July, for an annual rise of 3.2 per cent and 4.7 per cent, respectively, with the core inflation recording the smallest rise in nearly two years. US yields rose, with the 10-year yield rising above 4.10 per cent. 

(With Reuters inputs)