Government bond yields to decline after US Fed rate stance

Govt bond yields: The government bond yields are set to experience a slight decline on Thursday, in line with movements observed in US Treasury yields, following the Federal Reserve's stance of maintaining a desire to reduce rates despite acknowledging recent elevated inflation levels.

The benchmark 10-year yield, currently at 7.1855 per cent, is anticipated to fluctuate within a range of 7.16 per cent to 7.21 per cent, according to a trader from a primary dealership.

"While the Fed's stance and commentary remain largely unsurprising, the continued mention of potential rate cuts has bolstered Treasuries, prompting intermittent buying activity in the local market," noted the trader.

US yields saw a decrease post-Fed decision, with the 10-year yield hovering near the significant 4.60 per cent mark, and the two-year yield, a key gauge of interest rate expectations, around 4.95 per cent.

Federal Reserve Chair Jerome Powell highlighted the need for a longer timeframe than previously anticipated for policymakers to regain confidence in inflation returning to the target of 2 per cent, following three months of higher-than-expected price increases at the start of 2024.

Market participants are currently pricing in approximately 35 basis points (bps) of rate cuts in 2024, consistent with pre-Fed decision expectations but significantly lower compared to the over 150 bps projected at the beginning of the year, according to CME's FedWatch Tool.

Madhavi Arora, an economist at Emkay Global, reiterated expectations of no rate cuts by the Fed in 2024, noting that the policy trajectory aligns with earlier projections for the year.

Sentiment was further buoyed by a decline in oil prices, with Brent crude futures falling below $85 per barrel amidst unexpected increases in US crude stocks and the potential for a ceasefire agreement in the Middle East, which could alleviate supply concerns. India, being one of the largest importers of oil, is directly influenced by fluctuations in oil prices, impacting retail inflation levels.

(With Reuters inputs)