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Bond yields seen higher, tracking U.S. peers; Fed decision eyed

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MUMBAI — Indian government bond yields are expected to open marginally higher on Tuesday, tracking U.S. yields, as markets brace for another round of aggressive monetary policy tightening from the U.S. Federal Reserve.

The benchmark Indian 10-year government bond yield is seen in a 7.25%-7.30% band, a trader with a private bank said. The yield ended at 7.2769% on Monday and has risen 17 basis points in last four sessions.

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“A hike of 75 basis points is already factored into prices, but if there is hawkish commentary, the Reserve Bank of India will be forced to act in a similar manner, which is keeping traders nervous,” the trader said.

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Benchmark 10-year U.S. Treasury yields jumped to their highest level since 2011 on Monday, as investors adjusted for the prospect that the Federal Reserve will hike rates higher and for longer than previously expected.

Two-year yields reached 3.970%, the highest since November 2007. The two-year yield typically reflects interest rate expectations.

The Fed policy decision is due on Wednesday, with markets pricing in a 19% probability of a 100 bps hike.

The Fed’s policy would be followed by the RBI’s decision due on Sept. 30, with many market participants expecting a 50 bps rate hike.

On Monday, Morgan Stanley revised its projection to a 50 bps rate hike from the RBI, due to stubbornly high inflation and the pace at which major global central banks are hiking rates, it said.

India’s headline retail inflation has remained above the central bank’s upper tolerance level for eight straight months. The central bank raised interest rates by a total of 140 basis points during May-August. KEY INDICATORS: ** Brent crude futures little changed at $91.98 per barrel ** 10-year U.S. Treasury yield at 3.4846%, two-year note at 3.9485% ** Indian states to sell bonds worth 114 billion Indian rupees ($1.43 billion)

($1 = 79.6930 Indian rupees) (Reporting by Dharamraj Lalit Dhutia; Editing by Neha Arora)

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