July jog

The yield on the 10-year benchmark government security (G-sec; 7.26% GS 2033) opened July at 7.12% and closed at7.17%, up 6 basis points (bps) from its June close of 7.11%, and within CRISIL’s forecast range of 7.07-7.17%.

The first week of the month saw yields harden, tracking a surge in United States (US) Treasury yields and crude oilprices. Crude prices rose as the market assessed supply cuts announced by Saudi Arabia and Russia for August. The10-year US Treasury yield hardened 25 bps to close the week at 4.06% due to stronger-than-expected labour marketand economic data. In India, the 10-year benchmark paper 7.26% GS 2033 closed the week at 7.16%.

In the second week, yields softened, tracking a decline in US Treasury yields. The 10-year US Treasury yield eased 23bps to close at 3.83%, due to lower-than-expected US Consumer Price Index (CPI) inflation print. The US headlineinflation fell to 3.0% on-year in June from 4.0% in May, while the domestic CPI inflation rose to 4.81% after hitting a25-month low of 4.25%. The 10-year benchmark paper closed at 7.09%.

In the third week, bonds traded in a narrow price range owing to lack of firm cues. Market participants refrainedfrom placing large bets ahead of the US Federal Open Market Committee (FOMC) monetary policy decision due thefollowing week. The United Kingdom’s CPI inflation rose 7.9% in June, lower than in the previous month. In India, the10-year benchmark paper closed at 7.09%.

In the fourth week, yields hardened again, tracking a surge in US Treasury yields and crude prices. The 10-year USTreasury yield firmed up 12 bps to close at 3.96% as the FOMC raised the federal funds target range by 25 bps to a 22-year high of 5.25-5.50%, US gross domestic product and goods order data came in above expectations, and The Bankof Japan made a surprise decision on July 28 to loosen its yield curve control policy. The market also expected a spikein domestic inflation owing to inclement weather affecting food prices. The 10-year benchmark paper closed higherat 7.16%.

Coming into August, the Reserve Bank of India’s (RBI) Monetary Policy Committee kept the repo rate unchangedat 6.5% and maintained its policy stance at ‘withdrawal of accommodation’. However, the RBI raised its inflationprojection for this fiscal to 5.4%, after having lowered it in June to 5.1% from 5.2%. The RBI has also asked banks tomaintain a 10% incremental cash reserve ratio from August 12.