Bond yields soar with accelerating May inflation data

Pre May’s WPI Scenario:

Bond yields fell as investors gambled on expectation that inflation data if coming at sub 7% for the month of May would strengthen the case of 50 basis points rate cut by Reserve Bank of India (RBI) in its upcoming monetary policy review on June 18, 2012. While, sub 5% core inflation growth would cement views for a rate cut by the RBI at its policy meeting on Monday.

On the global front, benchmark US Treasury bonds edged down in Asia on Thursday ahead of 30-year Italian bond auction, later in the day, which could signal whether markets are confident enough that country can evade being the next one to need a bailout. Meanwhile, Brent crude held above $97 on Thursday, as investors remained reluctant to pile up positions ahead of the outcome of a meeting of producer group OPEC and Greek elections.

Back home, the yields on 10-year benchmark 8.79% - 2021 were trading lower by 4 basis points at 8.25% from its previous close of 8.29% on Wednesday.

The benchmark five-year interest rate swaps fell 3 basis points to 7.13% from its previous close of 7.16%.

Post May’s WPI Scenario:

India's main inflation gauge, the wholesale price index (WPI), almost rose close to the fastest pace this year at 7.55% for the month of May 2012, versus the previous month’s figure of 7.23% and previous year’s corresponding month’s figure of 9.56%, which is little lower than the consensus view of 7.60%.  Meanwhile, manufactured products index rose only 0.5% in May, translating into 5.02% rate of inflation, while food inflation rose 10.74%.

The yields on 10-year benchmark 8.79% - 2021 rose to 8.28% post the release of WPI figures, which dashed hopes of aggressive stance of RBI in its upcoming monetary policy review on June 18.