Government bond prices ended higher in the festival-shortened earlier week. The yield on the 10-year benchmark paper is currently trading at 6.3050%. The absence of a bond auction in the previous week provided support to prices. Comfortable liquidity conditions with the RBI holding reverse repo auctions to provide participants with opportunities to park surplus liquidity boosted the buying interest in sovereign bonds. The dovish policy stance from the Fed, ECB and BOE also influenced the sovereign bond yields to trade lower. The Fed’s calibrated tapering of asset purchases and a drop in petrol and diesel prices announced by the Government and reduction in VAT applied by the various state Governments have influenced a gradual fall in benchmark sovereign bond yield.
After the policy announcement by Fed last week, the 2-year yield fell by 10 bps now from the high of 0.5345% registered on 28-10-21. The differential between the 2-year and 10-year US yield has contracted to 103 bps from about 120 bps at the beginning of October 2021. The sharp fall in US 2-year yield gives an indication on rate hikes may be deferred by Fed well beyond the third quarter of 2022.
The DXY is currently trading at 94.04 from a 13-month high of 94.62 hit on Friday last week, as traders await fresh US inflation data to be released later in the week. The US annual consumer inflation is expected to hit more than a decade high of 5.8% in October making it difficult for the Fed to justify delaying interest rate hike. Due to the dollar’s weakness, all the Asian currencies have gained this week, led by a strong rise in Korean Won.