Indian bond yields to decline as treasury yields drop post inflation data

Indian government bond yields are expected to open with a gap down on Thursday, tracking a sharp drop in US Treasury yields as inflation in the world's largest economy turned out to be lower than estimates and has raised rate cut bets.

The benchmark 10-year yield is likely to move in the 7.03 per cent-7.08 per cent range, following its previous close of 7.0821 per cent, a trader with a state-run bank said.

"Market was bullish, but looking at the reaction in Treasuries, we are set to break the 7.05 per cent mark at open," the trader said.

 "There is room for a further decline as well, as the 10-year US yield is below the key technical level of 4.35 per cent US yields dropped on Wednesday and eased further in Asian hours on Thursday after data showed US consumer price inflation cooled in April, boosting expectations that the Federal Reserve will cut interest rates two times this year.

The consumer price index rose 0.3 per cent last month after advancing 0.4 per cent in March and February. In the 12 months through April, the CPI increased 3.4 per cent after climbing 3.5 per cent in March.

Inflation accelerated in the first quarter on strong domestic demand after moderating for much of last year.

The 10-year US yield slipped to its lowest level in six weeks and was around 4.32 per cent, while the two-year yield, a closer indicator of interest rate expectations was around 4.72 per cent.

The odds of a rate cut in September have risen to 75 per cent, up from 65 per cent, while the futures market has fully priced in two rate cuts by the Federal Reserve in 2024, according to CME FedWatch tool.

"In the front of the curve, the market is pricing in close to two cuts (September and December), broadly appropriate, in our view," DBS said in a note.

Traders will also await the response to the Indian government's second bond buyback in two weeks, as it aims to buy bonds worth up to 600 billion rupees ($7.19 billion) on Thursday.

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