Bond yields creep higher as higher inflation dents rate cut hopes

12 Jun 2013 Evaluate

Pre IIP and CPI Release Scenario:

Bond yields were treading water in early deals as investors awaited factory output data for the month of April and May CPI data, key data prints which may provide some cues on RBI’s stance in its upcoming monetary policy on Monday. The street widely expects India's industrial output to rise for a fourth consecutive month in April at 2.7% over the March 2.5% growth figure and 0.5 percent in February.

On the global front, US 10-year Treasury yield edged higher in Asian trade on Wednesday but stayed below a 14-month high as the market stabilized somewhat after the recent jump in yields lured some buyers back into the bond market. Brent futures dropped toward $102 on Wednesday after an unexpected jump in oil inventories in the world's largest consumer, the United States, while producer cartel OPEC and the US government both trimmed global demand forecasts.

Back home, the yields on 10-year 8.79% - 2021 bonds were trading 1 basis point lower at 7.29% from its previous close of 7.30% on Tuesday.

The benchmark five-year interest rate swaps were trading up 2 basis points lower at 7.01% from its previous close of 7.03% on Tuesday.

The Reserve Bank of India has announced the auction of 91 and 364-day Government of India Treasury Bills for notified amount of Rs 7,000 crore and Rs 5,000 crore respectively. The auction will be conducted on June 12, 2013 using 'Multiple Price Auction' method.

Post IIP and CPI Release:

Bond yields rose after data showed May retail inflation continued to remain high, denting hopes of a rate cut at RBI's policy review on June 17. Although IIP slowed down in the month of April, but weaker rupee and higher than expected inflation largely suggests the RBI would maintain a status quo in its key policy rates.

In a disappointment, India's annual industrial output growth measured by index of industrial production (IIP) grew by 2% for the month of April 2013, lower than street’s expectation and previous month’s figure of 2.5%. Meanwhile, annual rate of inflation, based on the consumer prices index (CPI), eased in the month of May at 9.31%, lower than expectation of sub 9% figure.

The yields on 10-year 8.79% - 2021 bonds rose 2 basis points at 7.32% from its previous close of 7.30% on Tuesday.

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