The 10-year benchmark 7.26% 2032 bond yield was at 7.xx% as of 10:00 a.m. IST, after closing lower at 7.4180% on Wednesday. "The sudden spike in U.S. yields will have a spillover impact on local bonds, but the 7.45% level is expected to see a strong support," a trader with a private bank said. The 10-year U.S. yield rose above the 4% mark for the first time in four months, while the two-year yield climbed to 4.92%, its highest levels since 2007, on higher interest rate fears. The two-year yield is a closer indicator of interest rate expectations. Strong economic data in the U.S. continued to fuel concerns that the Federal Reserve will tighten financial conditions more aggressively to fight inflation. The U.S. central bank has raised interest rates by 450 basis points to 4.50%-4.75% over the last year, while Fed fund futures show over 50% probability that rates may be hiked by another 100 bps till July. Continuously rising interest rates in the U.S. may put pressure on the Reserve Bank of India to follow suit. The RBI has raised the repo rate by 250 basis points since May 2022 to 6.50% and is widely expected to hike one more time next month.
Weaker-than-expected economic growth in October-December has not changed market expectations of a 25 bps hike in the repo rate in April.
The yield curve between the two-year and the 10-year government bonds is likely to invert on the back of worsening liquidity deficit in India's banking system and bets of continued rate hikes, and the short-end rates are expected to rise further, analysts said.
The 364-day Treasury Bill's cutoff yield rose to 7.39% on
Wednesday, its highest level in over four years.
(Reporting by Dharamraj Dhutia
Editing by Eileen Soreng)
