India bond yields rise as Fed hits sentiment before debt sale

MUMBAI: Indian government bond yields jumped on Thursday, as hawkish commentary from Federal Reserve chair Jerome Powell outweighed rate cut bets.

The benchmark bond yield ended at its highest level in two weeks ahead of fresh supply as New Delhi is scheduled to sell 300 billion rupees ($3.4 billion) of the 10-year bond on Friday.

The yield on the 10-year benchmark note climbed 4 basis points (bps) to 6.5139%, highest since September 3, after closing at 6.4726% on Wednesday.

The Federal Reserve reduced interest rates on Wednesday for the first time since December. The dot plot projects two more reductions this year to halt any slide in the labour market.

However, Powell said the Fed will be in a “meeting-by-meeting situation” regarding the rate cut outlook, and framed the move as a risk-management cut.

“The more dovish forward-looking median forecast was downplayed by the hawkish presser,” said Madhavi Arora, chief economist at Emkay Global Financial Services.

“Last year’s cuts were also risk management cuts, which opens the possibility that the current cycle could end after only a handful of cuts.”

MUFG termed it as a slightly hawkish leaning policy decision, which also pushed up the 10-year U.S. Treasury yield.

India bonds track Treauries higher prior to Fed policy

Still, the odds of an additional 50 bps of rate cuts in 2025 rose to 82%, up from 74% before the decision, according to the CME FedWatch Tool.

Meanwhile traders in India await the borrowing calendar for the second half of the fiscal year, which should be published before the end of September.

In a round of consultations with multiple market participants earlier this month, the central bank received suggestions to reduce the share of ultra-long bonds and cut weekly auction sizes.

Rates

India’s overnight index swap rates moved higher, with the longer end witnessing heavy paying.

The one-year OIS rate ended 2 bps higher at 5.47%, while the two-year OIS rate advanced by the same amount, ending at 5.44%.

The liquid five-year OIS rate rose 3 bps to settle at 5.7175%.