US economic weakness to reflect on bond yields, RBI minutes awaited

The government bond yields are expected to trend lower in the early session on Thursday, as US peers eased sharply after weak economic data, even as traders await minutes of the Reserve Bank of India's (RBI) latest policy due later in the day.

The benchmark 7.26 per cent 2033 bond yield is likely to be in the 7.17-7.22 per cent range after ending the previous session at 7.1927 per cent, a trader with a primary dealership said.

"Local bonds have already seen a bullish tilt since the last couple of sessions, and with US yields comfortably below the threatening levels, there should be some more follow-up buying today," the trader said.

US yields slumped, with the 10-year yield easing below the crucial 4.20 per cent mark. It hit 4.3660 per cent on Tuesday, the highest since November 2007.

US business growth at weakest since Feb

Yields eased after weak US and European business activity signalled global disinflation. US business activity approached the stagnation point in August, with growth at its weakest since February.

S&P Global said its flash US Composite PMI index, which tracks manufacturing and service sectors, fell to a reading of 50.4 in August from 52 in July, the biggest drop since November 2022, and also fractionally above the 50-level separating expansion and contraction.

Fed funds futures traders are pricing in over 100 basis points (bps) of rate cuts by end-2024. This is still down from around 140 bps from a few weeks earlier, but up from below 100 bps expectations earlier in the week.

RBI minutes to provide insights

The spread between Indian and US government bond yields is likely to rise after having fallen below 300 bps for the first time in 14 years.

Meanwhile, the RBI policy minutes will provide insight into the central bank's thinking on the inflation trajectory. It maintained a status quo on policy rates in the meeting but raised the inflation forecast for the quarter as well as the fiscal year.