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Indian government bonds, particularly those of shorter maturity, strengthened sharply on Monday, as the collapse of the California-based Silicon Valley Bank (SVB) prompted investors to rush to the safety of American debt, leading to a decline in US bond yields.
A decline in US bond yields increases the appeal of higher-yielding fixed-income assets in emerging markets, such as India. Bond prices and yields move inversely.
The most liquid Indian 10-year bond settled at a 7.36 per cent yield, against 7.43 per cent at close on Friday. Monday’s price action marked the sharpest single-day fall in the 10-year bond yield since October 4, 2022, Bloomberg data showed.
Mirroring the sharp fall in short-term US bond yields, the domestic five-year bond yield declined by a greater extent than the 10-year bond yield.
The yield on the most traded five-year government bond in the secondary market was last at 7.26 per cent, 14 basis points lower than the previous close. The sharper fall in short-term bond yields has caused the Indian sovereign yield curve to steepen after having flattened significantly and even witnessed inversions of late.
US bond yields plummeted as the seizure of SVB’s assets and the resultant ripples in the American banking sector led to anticipation of the Federal Reserve opting to either put off a fresh rate hike or to raise rates by a small quantum.
According to reports, analysts from Goldman Sachs said on Sunday that they no longer expect the US Federal Reserve to raise rates at its March 22 meeting, given the latest bout of volatility in the banking sector.
The yield on the 10-year US bond slumped 23 basis points (bps) on Friday, while that on the two-year bond, which is extremely sensitive to interest rate expectations, nosedived 31 bps.
“The most important takeaway that has emerged from the SVB episode is the possibility of the Federal Reserve going slow or pausing rate hikes. That is driving the bond rallies in the US and here,” said Naveen Singh, head of trading at ICICI Securities Primary Dealership.
“In India, the space for a bond rally is most at the one-year to three-year point of the curve, given the fact that the curve had become completely flat. Depending on what the Fed says later this month, we could test the 7.35 per cent level for the 10-year bond,” he said.
At present, Fed fund futures, which reflect future expectations on the trajectory of US policy rates, predict an 85 per cent chance of a 25-bps rate hike by the Fed this month and a 15 per cent chance of a pause in hikes. Earlier this month, the futures were forecasting an almost 70 per cent chance of a 50-bps hike by the Fed in March.
Certain aspects of a US official jobs report released Friday also strengthened the view of the Fed going easier on rate hikes. While job additions in February remained strong, the average hourly earnings rose by a lower-than-expected quantum.
The rupee, however, surrendered large gains notched up in early trade and settled on a weaker note versus the US dollar. The domestic currency closed at 82.13 per US dollar versus 82.05 at the previous close. Earlier in the day, the rupee had strengthened to a high of 81.75 per dollar as the greenback weakened globally following the sharp drop in US bond yields.
However, with the global wave of risk aversion causing emerging market currencies and stock markets to take a hit, the rupee reversed course. The dollar index, too, strengthened over the course of the day, pulling down the rupee.
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