Government bond yields expected to rise amid US rate surge

Government bond yields: Government bond yields are projected to open higher in the second quarter, influenced by rising US yields, which may exert selling pressure on domestic bonds.

Market sentiment remains cautious following lower-than-expected foreign inflows on the first day of national debt's inclusion in the widely-followed JPMorgan debt index.

The benchmark 10-year bond yield is anticipated to fluctuate between 6.99 per cent and 7.04 per cent, up from its previous close of 7.0095 per cent, according to a trader from a primary dealership. Last week, the yield increased by 4 basis points, despite recording a third consecutive quarterly decline.

"The lower-than-expected initial inflows surprised many market participants, but there is optimism for increased flows in the coming days. Currently, the rise in US Treasury yields has negatively impacted sentiment," the trader noted.

US yields climbed on Friday and continued their upward trend during Asian trading hours. This movement was driven by uncertainties surrounding the US presidential election and upcoming French legislative elections, despite earlier confidence from a slowdown in inflation.

The US 10-year yield surpassed its key technical resistance level of 4.35 per cent, indicating potential further increases, according to traders.

This rise occurred despite a flat reading in the personal consumption expenditures (PCE) price index for May, following a 0.3 per cent increase in April. Over the 12 months through May, the PCE price index rose by 2.6 per cent, down from 2.7 per cent in April.

Investors now expect the Federal Reserve to implement 50 basis points of rate cuts in 2024, with a 63 per cent probability of a cut in September, according to the CME FedWatch tool.

Domestically, foreign investors' response was subdued on Friday, purchasing only $200 million of government bonds following the JPMorgan index inclusion. However, total bond purchases under the Fully Accessible Route (FAR), which are now part of the index, have reached $11 billion since the announcement last September.

(with Reuters inputs)