Bond yields set for marginal uptick at the beginning of 2024

The dawn of 2024 is poised to bring a marginal uptick in Indian government bond yields, driven by a higher-than-expected borrowing schedule from states that could potentially dampen market sentiment.

According to a trader from a private bank, the 10-year benchmark bond yield is anticipated to fluctuate within the 7.15 per cent-7.21 per cent range on Monday, following its closure at 7.1754 per cent in the final session of 2023. Despite ending the year with a 15 basis points (bps) drop, the benchmark yield experienced a second consecutive monthly decline in December.

The absence of news regarding a fuel price cut over the weekend, a significant factor in Friday's rally, is expected to contribute to selling pressure in the first session of the new year. The unexpected surge in the borrowing plans of Indian states poses a challenge, with a target to raise Rs 4.13 lakh crore ($49.65 billion) through bond sales in January-March. This amount exceeds most market estimates, acting as a negative surprise to investors who had projected a calendar of around Rs 3.50 lakh crore, with some estimates reaching approximately Rs  3.90 lakh crore.

While bond yields concluded lower in the last trading session of 2023, market participants remain optimistic about the continuation of foreign inflows that surged in October-December, expecting them to bolster demand in the coming year.

Simultaneously, the 10-year US yield hovers around the critical 3.85 per cent level as investors anticipate a potential mild economic recession in the United States in 2024. This anticipation could prompt the Federal Reserve to consider rate cuts as early as March. The US yield experienced a significant drop of over 100 bps in November-December, offsetting the earlier rise in the first 10 months of the year, resulting in a minimal annual change.

Key indicators influencing market sentiment include Brent crude futures, which dipped 1.7 per cent to $77.05 per barrel, following a 1.6 per cent decrease in the previous session. Additionally, the 10-year US Treasury yield stands at 3.8600 per cent, while the two-year yield is at 4.2500 per cent. As the market opens its doors to the new year, investors closely monitor these factors that shape the trajectory of Indian bond yields in the early days of 2024.

(With Reuters inputs.)