Bond yields dip after U.S. inflation data; debt sale in focus

Indian government bond yields were lower in the early session on Friday after data showed U.S. inflation eased last month, calming fears over aggressive rate hikes.

The fall in yields was capped, as some traders booked profit ahead of debt supply through the weekly auction. New Delhi is expected to raise 300 billion rupees ($3.69 billion) through the sale of bonds.

The benchmark 10-year yield was at 7.2761%, as of 10:20 a.m. IST, after closing lower at 7.2859% on Thursday. The yield declined eight basis points (bps) in the last four sessions.

As easing inflation was priced in somewhat, the focus is now shifting to the debt sale, a trader with a state-run bank said, adding, the benchmark bond yield is unlikely to break the 7.26% handle.

"Though we may see decent demand at auction, traders may not be willing to add, if yields fall further."

The U.S. consumer price index dipped 0.1% last month, its the first fall since May 2020, data on Thursday showed. In the 12 months through December, the CPI accelerated to 6.5%, in line with estimates, and the smallest rise since October 2021.

The 10-year U.S. yield dropped below the crucial 3.50% handle, as investors are now expecting the Federal Reserve to not only end its rate hike cycle soon but reverse the same by the end of 2023.

The Fed raised interest rates by 425 bps in 2022 and is likely to hike by 25 bps in February.

Meanwhile, India's annual retail inflation rose 5.72% in December from 5.88% in the prior month. Analysts in a Reuters poll had predicted a December reading of 5.90%.

The reading remained within the central bank's tolerance level of 2%-6% for the second consecutive month amid cooling food prices.

Benign November-December inflation prints could lead to a 40-50 bps downward revision in the Reserve Bank of India's inflation forecast, Citi Research said in a note.

"Our base case remains of 25 bps hike in Feb-2023 with a likely change in stance to neutral." ($1 = 81.3900 Indian rupees)