Government's 10-year bond yield at 30-month low on bets of big Fed rate cut

Indian government bond yields declined on Friday, with the benchmark bond yield slipping to its lowest in nearly 30 months, on expectations of a big US rate cut next week.

The 10-year yield was at 6.7918 per cent as of 10:00 am IST, compared with its previous close of 6.8054 per cent. Earlier in the session, it fell to 6.7908 per cent, the lowest since March 31, 2022.

"The previous key level was finally taken out yesterday, and with renewed hopes of a larger rate cut from the Federal Reserve, there is strong impetus to break 6.80 per cent levels, but we are also seeing heavy offers," a trader with a state-run bank said.

US bond yields fell on Thursday as rate futures rallied in reaction to media reports suggesting the Fed decision on a rate cut of 25 or 50 basis points (bps) at its September 17-18 meeting would be a close one.

The Wall Street Journal and the Financial Times reported that the size of a rate reduction would be a tough call for the Fed, surprising markets that had anticipated a 25 bps cut.

The probability of a 50 bps move tripled from a day earlier to 43 per cent with aggregate cuts of 115 bps now expected over the three Fed meetings in 2024.

Bond market sentiment was upbeat after the Reserve Bank of India cancelled two treasury bill auctions, due in September, which will further boost banking system liquidity.

India's August retail inflation was at 3.65 per cent in August, data showed on Thursday. The print was higher than the revised 3.60 per cent in July but stayed below the central bank's target of 4 per cent for the second straight month even as vegetable prices soared.

New Delhi will sell bonds worth 220 billion rupees ($2.62 billion) later in the day. The auction should entice investors, as it is the last federal debt sale before the Fed decision.