Government bonds rose sharply on Tuesday, with the yield on the benchmark 10-year paper climbing 11 basis points (bps) as U.S. bond yields fell to their lowest levels in nearly two months, said the dealers.
A fall in US debt yields increases the attractiveness of fixed income instruments in emerging markets like India.
The yield on the benchmark 10-year 7.26% 2032 bond was 7.36%, down from 7.47% on Monday. Bond prices and yields move in opposite directions. A 1 basis point drop in the 10-year yield corresponds to a price increase of about 7 paise.
With falling US bond yields pushing the dollar index lower, the rupiah also strengthened strongly on Tuesday.
The rupiah closed at 81.52 to the dollar from 81.88 to the dollar at the previous close. The national currency has depreciated 8.8% against the US dollar since the start of the year.
The yield on 10-year U.S. Treasuries has fallen 23 basis points since Monday as weak U.S. economic data led to speculation that the Fed may slow the pace of rate hikes. The UK’s decision to roll back some tax cuts also supported the pound, leading to weakness in the dollar index.
The US dollar index, which measures the greenback against six major currencies, was at 111.20 at 3:30 p.m. IST on Tuesday. The index was at 112.48 at the same time on Monday.
“The rally in the bond market fully follows the development of the US bond market,” said Naveen Singh, head of trading at ICICI Securities Primary Dealership.
“Our yields had tightened by almost 20 basis points over the past week due to the rise in crude. Today, as the rally in US bonds continues, some traders rushed to cover short positions in domestic bonds. That’s why we’ve seen such a price rally,” he said.
While the move in the US bond market supported domestic bonds and the rupee on Tuesday, underlying sentiment remained weak ahead of the outcome of an OPEC meeting on Wednesday. Brent prices have jumped nearly 5% so far this week on speculation of OPEC announcing production cuts.
High crude oil prices pose upside risks to India’s inflation and current account deficit, given that the country is a major importer of the commodity.
“Brent rose further to near $90 a barrel as markets positioned themselves for the largest supply cut of nearly 1 million bpd on top of the previous cut of an equivalent quantum by the ‘OPEC since the 2020 COVID crisis,’ wrote CR Forex Advisors.
“For USD/INR, a drop near the 81.20 levels could be bought heavily as support (for the USD) is also there. On the other hand, 82.00 will remain a resistance created by the RBI and the pair could consolidate in the range between 81 and 82 levels for a few sessions,” the firm wrote.