Government bond yields may edge up prior to debt sale

Government bond yields are anticipated to experience a slight uptick in early trading on the final day of the week, as traders prepare for a new debt issuance through the weekly auction. Simultaneously, market participants await the release of the minutes from the recent central bank policy meeting.

The 10-year benchmark bond yield is expected to fluctuate within the range of 7.17 per cent to 7.21 per cent leading up to the debt sale, following its previous session close at 7.1897 per cent, according to a trader from a private bank.

The trader noted that selling pressure observed toward the end of the previous session is likely to persist, causing yields to inch higher until the debt auction concludes.

Despite the expected increase, the trader highlighted the importance of the 7.20 per cent level as a robust resistance, stressing that breaching this level would require negative demand surprises.

The government aims to raise Rs 30,000 crore ($3.61 billion) in the upcoming bond sale, including the liquid 14-year bond.

Traders will also closely monitor the minutes of the Reserve Bank of India's December meeting. In the previous meeting, the central bank maintained interest rates for the fifth consecutive time and adopted a cautious stance on inflation.

Traders are particularly interested in insights from central bank members regarding the expected interest rate trajectory in 2024, with prevailing expectations suggesting no rate action until the middle of the following year.

Meanwhile, US yields remained lower, with the 10-year yield hovering around the 3.90 per cent mark during Asian hours.

The inversion with the two-year yield narrowed ahead of the release of Personal Consumption Expenditures (PCE) data, an important inflation gauge.

Recent weeks have seen a decline in US yields, driven by increasing speculation that the Federal Reserve might implement rate cuts as early as March. 

The market currently assigns an 83 per cent probability to a Fed rate cut in March, while the central bank has projected three rate cuts in 2024, with the market pricing in six cuts of 25 basis points each.

(With Reuters Inputs)