Bond yields seen higher, tracking relentless rise in U.S. peers

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MUMBAI — Indian government bond yields are expected to rise in early trading on Monday, tracking an unabating spike in U.S. yields, as investors fear that central banks globally will keep tightening monetary policy to tackle soaring inflation.

The benchmark Indian 10-year government bond yield is seen in a 7.40%-7.45% band, a trader with a private bank said. The yield ended at 7.3926% on Friday, a two-month high, to log a 12-basis points gain for the week.

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“Till the time U.S. yields do not stabilize, (the) selloff in local bonds will continue,” the trader said. “As the week progresses, market will await the local central bank policy decision, with a 50 basis points hike on the cards.”

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The U.S. Treasury yield curve inversion continued to deepen, with yields also reacting to British government debt that jumped after the country’s new finance minister, Kwasi Kwarteng, unleashed historic tax cuts and huge increases in borrowing.

The 10-year U.S. yield jumped above 3.80%, its highest level in more than 12 years, while the two-year yield continued to trade near 15-year highs.

Last week, the Federal Reserve hiked interest rates by 75 bps for the third consecutive time and Chairman Jerome Powell said central bank officials are “strongly resolved” to bringing down inflation.

The Reserve Bank of India’s policy decision is due on Friday and the expectation is for a half-a-percentage-point hike.

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Twenty-six of 51 economists in a Reuters poll predicted the RBI to go for a 50 basis-point hike, taking the repo rate to 5.90%. Another 20 predicted a 35 bps increase. The remaining five penciled in more modest increases, ranging from 20 to 30 bps.

Still, sentiment may remain supported as benchmark Brent crude contract fell to its lowest level in eight months as rising interest rates raise fears of a recession that could impact demand of the commodity.

The contract fell 4.8% on Friday and easing oil prices aid India’s inflation outlook as the nation imports bulk of its oil requirement. KEY INDICATORS: ** Brent crude futures 0.3% higher at $86.38 per barrel ** 10-year U.S. Treasury yield at 3.7165%, two-year note at 4.2420% (Reporting by Dharamraj Lalit Dhutia; Editing by Savio D’Souza)