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Government bonds reversed initial gains and closed lower on Thursday as traders offloaded bonds when the yield on the 10-year bond neared 7.09 per cent, according to dealers.
They speculated that mutual funds repositioned themselves based on the prediction that the yield on the 10-year bond could rise to 7.18 per cent.
The yield on the benchmark 10-year bond settled at 7.12 per cent, compared to 7.10 per cent on Wednesday.
“In the past three-four days, we’ve seen buying pressure on the floating rated bonds (FRBs). I think mutual funds are purchasing FRBs and selling government securities,” a dealer at a state-owned bank said. “These are not good levels to sell bonds for profit; mutual funds are simply repositioning.”
Moreover, some traders took short positions ahead of Friday’s Rs 33,000 crore auction, further pushing yields, dealers noted.
“It’s a mix of both: mutual funds started selling first, then a few people took short positions,” a dealer at a primary dealership said. “Mutual funds believe the yield (on the 10-year bond) will increase to 7.18 per cent.”
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Yields initially dipped, tracking US Treasury yields, the dealers pointed out. The drop in US Treasury yields was due to the belief that the 25 basis point (bp) hike by the US Federal Reserve on Wednesday would conclude the series of hikes.
Since March 2022, the Fed has increased rates by 525 bps, pushing the federal funds rate to between 5.25 and 5.50 per cent -- the highest rate in over 22 years. In its policy review in June, the US rate-setting panel kept the rates unchanged.
Meanwhile, the Indian rupee gained on Thursday, settling at Rs 81.94 per US dollar, compared to Rs 82.00 per US dollar on Wednesday, influenced by a decrease in the dollar index following the Federal Reserve’s meeting outcome.
Fed Chairman Jerome Powell’s remarks suggested that the next move would depend on the data. “They said they would consider the data for their next decision, which the market interprets as dovish,” a dealer at a state-owned bank said.
Dealers said it seemed unlikely for the Federal Reserve to further raise interest rates, as it would necessitate a substantial surge in both consumer spending and prices.
Traders are now waiting for the policy decision by the European Central Bank. The central bank hiked rates by 25 bps, and market participants believe this may mark the end of its rate-hiking cycle.
On the domestic front, the market largely expects the Reserve Bank of India to maintain the repo rate for the current financial year. The expectations for rate cuts have moved to the June quarter of the next financial year due to escalating concerns over inflation, the dealers said.
