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Yield on the 10-year benchmark government bond rose 7 basis points to settle at 7.12% on Tuesday, its highest closing level since January 31. Bond prices and yields move inversely.
A rise in government bond yields makes it more expensive for companies to borrow as corporate bond yields are benchmarked to sovereign bond yields.
Data showed that US manufacturing business activity strengthened in March, weakening the case for rate cuts by the Federal, especially when recent inflation prints in the country have been on the higher side.
The 10-year US bond yield rose well above the 4.30% mark, having clocked an increase of more than 10 basis points since the end of last month.
“The main trigger for the selloff in our bond market was the action in US bonds – the case for US rate cuts is looking increasingly weaker,” said Vijay Sharma, senior executive vice president at PNB Gilts, predicting a range of 7.04-7.13% for the 10-year bond yield in coming days.According to the CME Fedwatch Tool, the probability of the Fed lowering interest rates in June was at 59%, much lower than last week.Traders said that the Reserve Bank of India’s decision to shift back to the multiple price method for all auctions of government bonds had also contributed to the volatility in the market.
“First, the market positioning was very heavy – everyone had gone long on bonds because of index inclusion and broad hopes of global monetary policy easing starting from the second half of 2024,” said Naveen Singh, head of trading, ICICI Securities Primary Dealership.
“The decision to go back to multiple price auctions was received in a mixed way. When the market is bullish it doesn’t matter, but when the view is bearish, there can be swings in prices,” he said.
In a multiple price auction, buyers are allotted bonds at the particular price at which they have bid as long as the bid was above the cutoff price set by the RBI. In the uniform price method, all investors receive bonds at the same price, regardless of where they placed bids.
However, with the central bank having announced an auction of a new 10-year bond this week, the rise in yields was capped. The auction of a new 10-year bond is typically greeted enthusiastically by the market. The 10-year bond, which is the pricing benchmark for the sovereign yield curve, is typically the most sought-after paper in the market.
Bond dealers expect the coupon – rate of interest – on the new bond to be set at levels similar to the existing yield on the current 10-year paper.
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