Bond yields rise on record state supply, rupee weakness

Bond yields rise: Government bond yields saw an upward trend on Friday, fuelled by surprise announcements from states planning another round of record debt sales in the final week of the financial year. Additionally, the depreciation of the local currency to a record low further dampened investor sentiment.

The benchmark 10-year yield ended at 7.0927 per cent, slightly higher than its previous close of 7.0477 per cent. Pankaj Pathak, Senior Fixed Income Fund Manager at Quantum Mutual Fund, expressed expectations for bond yields to decrease from current levels, citing factors such as declining inflation, potential rate cuts in India and globally, favourable demand-supply dynamics, and global bond index inclusion.

States are aiming to raise a staggering Rs 60,032 crore through bond auctions scheduled for Tuesday, following two separate auctions earlier this week that saw states selling Rs 50,200 crore and Rs 24,000 crore worth of bonds. The surge in bond supply from states is set to propel the fiscal year's total issuance to an all-time high of over Rs 10 lakh crore, with India's fiscal year concluding on March 31.

Meanwhile, US bond yields exhibited volatility with an upward bias, amid concerns arising from recent economic data impacting the timing of rate cuts by the Federal Reserve. The 10-year US yield hovered around 4.25 per cent in Asian trading hours, while the two-year yield stood at 4.6105 per cent.

Recent economic indicators, including reports indicating slower-than-expected decline in inflation, have prompted questions among traders regarding the anticipated timing of the Federal Reserve's rate adjustments. Despite unexpected strength in inflation data, Fed Chair Jerome Powell maintained a steady outlook on price pressures during Wednesday's policy meeting.

The Fed's stance this week reiterated its projection for three rate cuts in 2024. Traders in federal funds futures have increased their bets on a rate cut by June to 73 per cent, according to data from CME Group's FedWatch tool.

(With Reuters inputs)