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Government bond (G-sec) yields are expected to stabilise after witnessing a surge in the previous week on the back of institutional demand at technical levels, said dealers.
Moreover, domestic consumer price index (CPI) data was along expected lines and the market currently lacks significant domestic cues.
The market will closely monitor the movement of crude oil prices, given that the conflict is hotting up in West Asia, said dealers.
“The rising tension between Iran and Israel has thrown this region into deeper crisis. The unabated geopolitical tensions will lead to a rise in crude prices that will be a big worry for us,” said VRC Reddy, head of treasury at Karur Vysya Bank.
“The 10-year bond yield spiked to 7.18 per cent levels on account of global factors despite the favourable CPI. The pressure on yields will continue next week, backed by global uncertainties. However, institutional demand at this level will ebb any further rise. Ten-year bonds will trade in the range of 7.15-21 range,” he added.
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Heightened West Asia tensions involving Iran, Israel, and Hamas, led to the rise in crude oil prices. This comes as the potential for trade disruption looms if the conflict escalates between Israel and Iran.
Brent crude settled at $90.45 a barrel on Friday. Meanwhile, ongoing conflicts in Ukraine, alongside escalating tension in North Korea and Taiwan, added to the geopolitical concerns.
Bond yields reversed course in April after exhibiting softening bias in March, due to surge in US yields and rate cut expectations being pushed back.
The 10-year benchmark government bond yield hardened by 12 basis points (bps) in April so far. It settled at 7.18 per cent on Friday.
Back home, CPI headline inflation eased to 4.85 per cent in March compared to 5.1 per cent in February. This was along market expectations.
“Domestic inflation print is unlikely to have a major impact on yields as the print was largely in line with market expectations. We expect the 10-year yield to trade in the range of 7.15-7.25 per cent in the near term, tracking an uptick in US yields and high crude oil prices,” said a note by HDFC Bank.
Higher-than-expected inflation data from the US indicated that interest rates will remain higher for longer. Consequently, yield on the benchmark 10-year US Treasury notes surged beyond the psychologically crucial 4.5 per cent mark. US CPI for March was 3.5 per cent, against the market expectation of 3.4 per cent.
“It has already moved to less than two cuts in the US. And, June is completely priced out. The Fed, in its dot plot, had said it will cut rates three times. Even though it tried to defend its dot plot, the market feels the Fed may not be able to cut it,” said Naveen Singh, vice-president of ICICI Securities' primary dealership.
According to CME’s Fedwatch tool, only 25 per cent traders expect the US Federal Reserve to cut rates in June.
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