Indian bonds plunge following US debt market; inflation data in focus

The Indian bonds plunged Monday following a rise in the United States Treasury yields after hawkish comments made by the Federal Reserve policymakers.

The yield on the benchmark 10-year bonds, which moves inversely to its price, rose 2-1/2 basis points to 7.085 percent, the 5-year note yield also climbed 2-1/2 basis points to 6.964 percent, the super-long 30-year Treasury yield jumped 4 basis points to 7.243 percent and the short-term 2-year note yield bounced 1 basis point to 6.804 percent by 07:00 GMT.

The United States Federal Reserve rate hike speculation gathered steam following hawkish comments from the Fed policymakers. Also, Bloomberg’s implied portability for a rate hike increased to 30 percent for the September policy meeting, up from 25 percent calculated at the end of last week.

Moreover, the Boston Federal Reserve President Eric Rosengren (a voter in 2016) said that he sees a reasonable case for gradual rate increases and a failure to continue the path of gradual rate normalisation could shorten the recovery; history shows the difficulty of slowing the economy after waiting too long to tighten policy.

He further added that payrolls growth has been somewhat choppy of late, but the United States economy is performing quite well, has proven resilient to international risks, and is at/close to full employment.

Additionally, Fed Governor Daniel Tarullo, speaking on CNBC, said that he will comment on the timing of Fed rate increases, but wouldnt foreclose the possibility of a rise this year. Also, would want evidence that inflation will rise and can be sustained at 2 percent and answer to low-rate risks isnt necessary to hike. On balance his remarks seem to be on the side of holding off from tightening policy.

In addition, Dallas Fed President Robert Steven Kaplan said that the case for a rate hike has strengthened in the last few months, but the Fed can afford to be patient because neutral rates are low. He further added that low rates create distortions/imbalances and the Fed will debate this over the next few months. The ISM reports a little more negative than expected and does not think the economy is overheating, he added.

Lastly, investors will remain keen to focus on the upcoming August consumer price index (CPI) and wholesale price index (WPI) data.

Meanwhile, the Sensex fell 1.38 percent or 394.43 points to 28,402.82 and Nifty-50 futures traded 1.69 percent lower or 148.75 points at 8,756.26 by 07:10 GMT.