Bond yields fall over 18 bps because of cooling inflation, easing oil prices

by IANS |

Mumbai, Sep 10 (IANS) The yield on benchmark government bonds fell sharply in last few weeks, by over 18 basis points, due to cooling inflation and falling Brent crude oil prices in the international market.

The yield on 10-year benchmark 6.54 per cent-2032 bond yield, which was trading at 7.32 per cent in the last month, has eased to 7.13 per cent this month.

"Besides crude oil prices easing out, there is an expectation of Indian Bond Index inclusion very soon. This news has created a positive vibe amongst investor and trading segment as the market is now expecting over $30 billion inflow in debt securities. This has resulted the government bond yields to fall continuously," said Venkatakrishnan Srinivasan, founder and Managing Partner at Rockfort Fincorp LLP, a Mumbai-based debt advisory firm.

Inflation prints, which have peaked a few months ago, have seen a sharp decline in July, with CPI easing to 6.70 per cent in July on back of easing food prices. However, the overall numbers still remained above the Reserve Bank of India's (RBI) upper tolerance band for the seventh consecutive month.

"Expect the bonds yields to rally further from here if we don't see any shock and surprises from inflation aspect. Resumption of FPI flows eventually may take Gsec yields of 10 year below 7 as well in this month end," said Ajay Manglunia, Managing Director and Head Institutional Fixed Income at JM Financial.

Meanwhile, the sentiments of traders have improved after the reports stated that JP Morgan to make an announcement as early as next week regarding inclusion of G-Secs in global bond indices.

Market participants expect post this announcement, yields on these instruments to fall sharply and on the benchmark bond it may fall below 7 per cent.

Earlier this week, Finance Minister Nirmala Sitharaman had said that the 2020 budget proposal on allowing bonds inclusion in global indices may not go forward as the fund flows did not meet the desired levels.

Srinivasan said: "Market will continue to be positive as of now based on the expectation of Government bond index inclusion. It will take further clue on second half borrowing calendar. The fall in oil prices will add to the fuel of positive bond market rally to some extent."

On Wednesday, Brent crude oil price in the international market fell sharply lowest since before Russia invaded Ukraine on worries of a global economic recession and lower fuel demand.

Brent crude oil prices were trading at $88.80 a barrel on Thursday.

Oil's deep loss on Wednesday came despite several supportive market factors. Russian President Vladimir Putin said the country would not supply energy to any nations that backed a planned US-led price cap on the nation's crude. In addition, the Energy Information Administration raised its outlook for global oil demand, while also cutting the forecast for US supply.

Going ahead, market experts said traders will take cue from August inflation numbers as well as oil prices in the international market. "We can expect the 10 year bond to trade in the range of 7.10-7.40 levels. The launch of sovereign green bond sale will be an positive factor to keep the yields under control, as the Government is expecting very fine rates," Srinivasan added.

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