Bond yields stabilise ahead of government's debt buyback

Government bond yields remained largely unchanged on Wednesday as market participants awaited clear directional cues ahead of the government's scheduled buyback of securities.

The benchmark 10-year yield closed at 7.1343 per cent, slightly higher than its previous close of 7.1284 per cent.

VRC Reddy, Treasury Head at Karur Vysya Bank, noted, "Bond yields have moderated following the recent decline in US yields and oil prices. The government's bond buyback initiative is viewed positively, but we await fresh triggers to potentially drive yields further down."

The Reserve Bank of India (RBI) is set to conduct a bond buyback worth up to Rs 40,000 crore on Thursday, aiming to inject liquidity into the banking system, which has been experiencing a deficit in recent weeks.

The central bank's move to ease liquidity conditions comes amidst ongoing national elections spanning over six weeks, which have impacted government spending despite robust tax collections, according to market analysts.

Bond yields have also shown a downward trend in recent days, in line with US counterparts, following weaker-than-expected April nonfarm payrolls data. This has increased expectations of two rate cuts by the Federal Reserve in 2024, with the 10-year US yield remaining below 4.50 per cent this week.

Market data from LSEG's rate probability app, FEDWATCH, indicates that traders are pricing in 44 basis points of rate cuts for 2024, up from around 34 bps the previous week. This contrasts with earlier expectations of just one rate cut for the year, reflecting changing market sentiment amidst ongoing economic uncertainties.

Foreign investors' activity in the market, which has predominantly seen selling since the beginning of the financial year, and upcoming inflation data from both India and the United States next week, will be closely monitored by market participants.

Retail inflation data, scheduled for release on Monday, is anticipated to show a marginal decrease to 4.8 per cent, as forecasted by Barclays, compared to 4.85 per cent in March.

(With Reuters inputs)