Bond yields decline by easing US yields; buyback plan boosts demand

Government bond yields saw a decline on Monday, mirroring a sharp drop in US bond yields following softer-than-expected jobs data. Additionally, a surprise bond buyback announcement by the government further fuelled demand for bonds.

India's benchmark 10-year yield closed at 7.1068 per cent, marking its lowest level since April 10, down from its previous close of 7.1470 per cent.

US Treasury yields experienced a dip to multi-week lows on Friday after the release of disappointing job creation figures for April, reinforcing expectations of potential interest rate cuts by the Federal Reserve later this year.

Yogesh Kalinge, vice president at A.K. Capital Services, noted, "US yields calmed down and fell below 4.50 per cent after a recent sharp rise. This, coupled with increased odds of rate cuts by the Federal Reserve, sparked a rally in bond prices today."

Kalinge added, "If US yields continue to decrease, it's possible that the local benchmark bond yield may drop below 7.10 per cent, potentially prompting profit booking."

According to LSEG's rate probability app, US rate futures are pricing in one-to-two rate cuts of 25 basis points each for 2024, with expectations of cuts likely beginning in September or November. Prior to the release of the jobs data, the futures market had factored in only one rate cut.

India's short-term bond yields witnessed a decrease of 3-5 basis points on Monday following New Delhi's announcement of a bond buyback plan worth Rs 40,000 crore scheduled for Friday. This move aims to inject funds into the banking system, particularly as the ongoing national election, spanning over six weeks, is impacting government spending.

Reserve Bank of India is taking steps to alleviate liquidity conditions in the banking system amidst the prolonged national election period.

(With Reuters inputs)