Updated March 21st, 2024 at 18:21 IST

Bond yields plummet as Fed sticks to rate cut forecast for 2024

The benchmark 10-year yield concluded at 7.0477 per cent, down from its previous close of 7.0918 per cent.

Reported by: Business Desk
Government bonds | Image:Shutterstock
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Government bond yields plunged on Thursday, mirroring a sharp decline in US counterparts following the Federal Reserve's decision to maintain its projection for three rate cuts this year.

Adding to the positive sentiment was a surprise rate cut by the Swiss National Bank, marking it as the first major central bank to ease monetary policy conditions, further buoying investor confidence.

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The benchmark 10-year yield ended at 7.0477 per cent, down from its previous close of 7.0918 per cent.

US bond yields also retreated on Wednesday and continued their descent during Asian trading hours on Thursday, driven by the Fed's reaffirmed intention to reduce interest rates based on its updated economic forecasts.

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Despite recent inflation data showing unexpected strength, Fed Chair Jerome Powell maintained a steady outlook on price pressures. The central bank revised its projections for GDP and core personal consumption expenditure for the October-December period, while still maintaining expectations for three rate cuts.

Deepak Agrawal, Chief Investment Officer of Debt at Kotak Mahindra AMC, commented, "This suggests the Federal Reserve is likely to tolerate higher inflation in the near term to facilitate a soft landing in the US economy."

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Agrawal further added, "The Fed would continue to remain data dependent, and we believe it is likely to commence rate cuts in the middle of 2024."

Powell emphasized that the timing of rate adjustments in 2024 hinges on achieving more certainty regarding inflation declining towards the 2 per cent target.

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According to the CME FedWatch tool, the probability of a rate cut in June has risen to 75 per cent from 59 per cent prior to the Fed's decision.

Anitha Rangan, Economist at Equirus Group, noted, "With the Fed maintaining its stance, the Reserve Bank of India (RBI) will also need to remain vigilant. With well-controlled twin deficits, the RBI has the flexibility to adopt a wait-and-watch approach."

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The RBI has maintained its interest rate at 6.5 per cent over the past six policy meetings, indicating a willingness to consider rate cuts only when retail inflation eases closer to the 4 per cent target on a sustainable basis.

(With Reuters inputs)
 

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Published March 21st, 2024 at 17:20 IST