Indian benchmark bond yield eases, tracking Treasuries, as traders take comfort from US Fed action

In hiking its key rate, the US Federal Reserve on March 22 refused to lower its guard on persistently high inflation, but assured markets battered by a banking crisis that it had enough firepower to avert a contagion.

The Fed action came days after Silicon Valley Bank and two other regional banks failed after mounting losses on their bond portfolios and large-scale fund withdrawals by depositors cracked their balance sheets.

“Markets derived some comfort as the Fed did a token rate hike amid this uncertainty, in spite of its warning to accelerate the pace of rate hikes…May be next year, rate cut expectations will starts building up as we see moderate numbers for inflation,” said Ajay Manglunia, Managing Director and Head of the Investment Group at JM Financial.

Money market dealers also said the yield on bonds also eased tracking US Treasury yields.

The 10-year US Treasury yield was down 11 basis points at 3.48 percent from 3.59 percent in the previous trading session. The 2-year US Treasury was last trading at 3.96 percent, down almost 20 basis points.

Also read: US Fed raises rates by quarter point to fight inflation despite banking sector crisis

US Fed decision

The Fed increased its funds target rate to a range of 4.75-5 percent.

“The (Federal Open Market) Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-3/4 to 5 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy,” the Fed said in a statement.

Fed policymakers projected that the rate would end 2023 at about 5.1 percent, unchanged from their median estimate from the last round of forecasts in December. The median 2024 projection rose to 4.3 percent from 4.1 percent.

The committee said it will continue reducing its holdings of Treasury securities and agency debt and mortgage-backed securities.

Yield outlook

In India, dealers are expecting the yield on the benchmark bond to remain in a range of 7.30-40 percent until next week.

This is due to the absence of major cues in the domestic market.

“Bond yields are expected to remain range-bound, ie. 10-year benchmark, broadly at 7.30-7.40 percent levels, amid absence of any major market factor as 25 bps was already discounted,” said Nagesh Chauhan, Head of Debt Capital Markets, Tipsons Group, a merchant banker registered by the Securities and Exchange Board of India.

Also Read | Swiss central bank hikes rate by 0.5 percentage points

Rate hike expectations

Money market dealers are divided about the course the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) will adopt when it meets next month.

Those who are expecting a rate hike, project the MPC to hike the repo rate by 25 basis points, after increasing it by 2.5 percentage points from 4 percent since May 2022.

“Considering the global developments, RBI could go in for another 25-30 bps hike in April; however there would be a reversal of the yield trend in case RBI pauses rate hikes in the next MPC meeting,” Chauhan added.

Vivek Iyer, partner and leader of financial services risk at Grant Thornton Bharat, thinks RBI will decouple itself from the Fed rate action and tread an independent path “which may either be a pause or a minor rate hike of 15 bps.”