Bond yields climb for third consecutive week on geopolitical tensions

Government bond yields continued their upward trajectory for the third consecutive week, driven by escalating tensions in the Middle East and lingering concerns regarding the timing of potential rate cuts by the US Federal Reserve.

The yield on the benchmark Indian 10-year note concluded the week at 7.2278 per cent, marking a notable increase from the previous session's close of 7.1905 per cent. This upward trend resulted in a 5 basis points (bps) rise for the week, following a 6 bps increase in the preceding week.

The 10-year bond yield reached a three-month high, tracking a rebound in global oil prices. Reports of Israeli missile strikes in Iran sparked fears of potential disruptions in oil supply, causing oil prices to surge. Given India's status as a major oil importer, higher oil prices have the potential to exacerbate retail inflation, making the Reserve Bank of India's 4 per cent target more challenging to attain.

Debendra Kumar Dash, Senior Vice President of Treasury at AU Small Finance Bank, commented on the situation, stating, "The negative global developments have weighed on market sentiment. Middle East tensions affecting oil prices and strong US data suggesting fewer and delayed Federal Reserve rate cuts are pushing local yields higher."

Furthermore, uncertainty surrounding the Fed's stance on rate cuts contributed to the upward pressure on bond yields. Despite steady labour market data in the US, Fed officials have expressed reluctance to implement rate cuts prematurely, citing the continued strength of the labour market as a factor. Consequently, markets have adjusted their expectations, with the CME's FedWatch Tool indicating a total of 42 bps of rate cuts expected by the end of the year, compared to over 160 bps anticipated earlier in the year. The first rate reduction is now projected for September.

(With Reuters inputs)