US bond yields fall to 2-month low, rupee weak

On Tuesday, government bonds strengthened sharply with yield on the 10 year benchmark paper hurting 11 basis points bps as US bond yields fell to their lowest levels in almost two months, dealers said.

A fall in yields increases the appeal of fixed-income instruments in emerging markets such as India.

The yield on the 10 year benchmark of 7.26 per cent 2032 was 7.36 per cent, against 7.47 per cent on Monday. Bond prices and yields move inversely. A fall of 1 basis point in the 10 year yield corresponds to a rise in the price of around 7 paise.

The rupee also strengthened sharply on Tuesday as the dollar index fell with the decline in US bond yields pushing the dollar index lower.

The rupee was trading at 81.52 per dollar against 81.88 per dollar at the previous close. The domestic currency has depreciated 8.8 per cent against the US dollar so far in the year.

Since Monday, the yield on the US treasury has plummeted 23 bps as weak US economic data led to speculation of the Fed having to slow down rate hikes. The UK's decision to reverse certain tax cuts bolstered the pound, leading to weakness in the dollar index.

The US dollar index, which measures the dollar against six major currencies, was at 111.20 on Tuesday at 3: 30 pm IST. The index was at 112.48 at the same time on Monday.

Naveen Singh, head of trading at the ICICI Securities Primary Dealership said that the bond market is tracking the move in the US bond market.

The rise in crude has made our yields grow by close to 20 bps over the last week. With the rally in US bonds continuing, some traders rushed to cover short positions in domestic bonds. He said that we saw a huge rise in prices.

The US bond market rallied support for domestic bonds and the rupee on Tuesday, but the underlying sentiment remained weak ahead of the outcome of a meeting of the OPEC on Wednesday. The price of crude has jumped close to 5 per cent this week on speculation of OPEC announcing output cuts.

The country is a major importer of crude oil, which poses upside risks to India's current account deficit and inflation.

The previous cut of an equivalent quantum by the OPEC since the 2020 COVID crisis has resulted in a rise in Brent to nearly 90 per barrel, according to CR Forex Advisors.

The support for the dollar also lies there, which could be bought heavily if the USD INR dips near 81.20 levels. The firm wrote that 82.00 would remain a resistance created by the RBI, and the pair could consolidate in the range between 81 and 82 levels for a few sessions.