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Bonds strengthen sharply as growth fears drag down US debt yields

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Government bonds strengthened sharply on Tuesday, with yield on the 10-year benchmark paper hurtling 11 basis points (bps) as US bond yields declined to their lowest levels in almost two months, dealers said.


A fall in yields increases the appeal of fixed-income instruments in emerging markets such as India.


Yield on the 10-year benchmark 7.26 per cent 2032 bond settled at 7.36 per cent, against 7.47 per cent on Monday. Bond prices and yields move inversely. A fall of 1 basis point in the 10-year yield corresponds to a rise in price of around 7 paise.


With the decline in US bond yields pushing the dollar index lower, the rupee, too, strengthened sharply on Tuesday.


The rupee closed at 81.52 per dollar against 81.88 per dollar at previous close. The domestic currency has depreciated 8.8 per cent against the US dollar so far in the year.


Yield on the 10-year US treasury note has plummeted 23 bps since Monday as weak US economic data led to speculation of the Fed having to slow down the pace of rate hikes. The UK’s decision to reverse certain tax cuts also bolstered 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 pm IST on Tuesday. The index was at 112.48 at the same time on Monday.


Chart


“The rally in the bond market is entirely tracking the move in the US bond market,” said Naveen Singh, head of trading at ICICI Securities Primary Dealership.


“Our yields had hardened by close to 20 bps over the last week because of the rise in crude. Today, with the rally in US bonds continuing, some traders rushed to cover short positions in domestic bonds. That is why we saw such a sharp rise in prices,” he said.


While the movement in the US bond market lent support to domestic bonds and the rupee on Tuesday, the underlying sentiment remained weak ahead of the outcome of a meeting by the OPEC on Wednesday. Brent crude prices have jumped close to 5 per cent so far this week on speculation of OPEC announcing output 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 nearly $90 per barrel as markets positioned for the biggest supply cut of nearly 1 million bpd in addition to the previous cut of an equivalent quantum by OPEC since the 2020 COVID crisis,” CR Forex Advisors wrote.


“For the USD/INR, a dip near 81.20 levels could be bought heavily as the support (for the dollar), too, lies there. On the flipside, 82.00 shall 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.

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