Indian bonds slide tracking U.S. money market, December CPI in focus

Indian sovereign bonds fell during the early trading session Monday, tracking developments in the United States’ money market. Strong recovery in the U.S. wage growth has weighed on investors’ safe-haven buying, leading to a downward trend in its debt market.

The yield on the benchmark 10-year bonds, which moves inversely to its price, rose 1 basis point to 6.40 percent, the yield on long-term 19-year note also surged nearly 3 basis points to 7.00 percent while the yield on short-term 3-year note inched 1/2 basis point higher to 6.37 percent by 08:00 GMT.

It is worth noting that the benchmark 10-year yields fell nearly 160 basis points to 6.18 percent in 2016 as subdued inflation and negative demonetisation raised expectations for the RBI rate cut. We at FxWirePro expect this is also likely to continue even in 2017.

The Indian government bonds have been closely following developments in the U.S. debt market. The benchmark 10-year bond yields witnessed a heavy sell-off, pushing yields by 5 basis points to 2.42 percent during early morning trade on strong rebound in wages, pointing to sustained momentum in the country’s labor market. However, markets shrugged off lower-than-expected non-farm payrolls and rise in the rate of unemployment.

U.S. average hourly earnings rose 0.4 percent m/m, while non-farm payrolls came in at 156,000, lower than market expectations of 178,000. Further, the rate of unemployment December slightly rose to 4.7 percent, from 4.6 percent in November.

In addition, the country’s inflation is anticipated to have eased further in coming months due to failure of demonetisation. This masterstroke brought in a pool of electronic transactions that deprived many of hand-to-hand cash exchanges, thus leaving the citizens in a wide array of lower spends overall.

Retail inflation rose 3.63 percent in November from a year earlier, the slowest pace of annual expansion in two years and against 4.20 percent in October. The lower spread of cash transactions, coupled with a maximum limit on ATM withdrawals has pressurized the prices of many retail commodities, including luxuries and real estate prices as well.

Lastly, markets now look forward to the release of consumer price inflation data on January 12, Thursday for further direction in the bond market.

Meanwhile, the 30-share benchmark Sensex traded 0.05 percent higher at 26,772.94, while the 50-share benchmark Nifty futures traded 0.02 percent higher or 1.10 points at 8,244.50 by 08:30 GMT.