Bond yields to move upward as US rates resume ascending trajectory

Government bond yields: Government bond yields are anticipated to see a slight increase in early trading on Thursday, mirroring the rise in Treasury yields ahead of the Federal Reserve's monetary policy decision, following a brief decline in recent sessions.

The benchmark 10-year yield is projected to fluctuate within the range of 7.03 per cent to 7.07 per cent, following its previous close of 7.0405 per cent, as reported by a trader from a private bank.

The resurgence in US yields, particularly nearing the 4.20 per cent mark for the 10-year Treasury, might impact sentiment to some extent. 

However, major sell-offs in the Indian fixed income market are deemed improbable due to favourable broader fundamentals and demand-supply dynamics, the trader noted.

Speculation surrounding persistent inflation readings in recent data has fueled expectations that the Fed might refrain from aggressive rate cuts.

The latest consumer price index figures, indicating a 3.2 per cent increase over the past 12 months, have raised concerns among Fed members, potentially tempering their rate cut projections for 2024.

While the probability of a rate cut in June has decreased to 67 per cent from 74 per cent last month, the likelihood of such action in May has dropped notably to 7 per cent from 23 per cent a week ago, according to the CME FedWatch tool.

Market analysts anticipate that data dependency will remain pivotal at the upcoming Fed meeting, with officials likely maintaining broadly unchanged interest rate projections. 

Capital Economics expects the first rate cut to occur in June, contingent upon improved inflation data in the coming months.

Additionally, local bond traders are keeping a watchful eye on rising oil prices, as sustained high levels may trickle into domestic retail inflation, potentially delaying rate easing by the Reserve Bank of India (RBI).

(With Reuters Inputs)