India bonds extend recovery tracking rise in U.S. Treasuries

Indian government bonds rose early on Thursday for a second straight session, tracking overnight gains in U.S. Treasuries after softer U.S. data eased concerns about an imminent Federal Reserve rate hike.

The benchmark 6.94% 2036 bond yield fell 3 basis points to 6.7436% by 11:10 a.m. IST, extending ‌its two-day decline ⁠to ⁠5 basis points after hitting a three-week high on Tuesday.

The yield also traded below its 21-day moving average, a technical level traders said could pave the way for further gains.


The 10-year U.S. Treasury yield fell overnight to 4.55% after U.S. producer prices unexpectedly declined 0.3% last month, against expectations for no change, following a soft inflation reading.

The data prompted investors to pare ⁠Fed rate-hike ‌bets, with futures pricing almost no chance of a July increase and a 51% probability in September, down from 25% ⁠and 75%, respectively.

Lower U.S. yields eased pressure on emerging-market debt, helping Indian bonds recover. Brent crude fell below $85 a barrel despite fresh Gulf tensions and Strait of Hormuz supply disruptions, easing concerns over imported inflation.

Several economists have also scaled back domestic rate-hike calls as inflation expectations eased.

"By our estimates, July inflation is tracking lower at 4.0% year on year, from 4.4% in June..for FY27, we ‌forecast inflation at 4.6%, the current account deficit at 1.2% of GDP and an extended RBI hold," Nomura wrote in a note.

Flows added support
State-run lenders bought ⁠156 billion rupees ($1.62 billion) of bonds over the last three sessions.

Foreign investors also stayed active, buying more than $4.2 billion of Fully Accessible Route bonds since June 1 on expectations India will be included in Bloomberg's Global Aggregate Index.

RATES
India's overnight index swaps eased in line with U.S. yields.

The 1-year was down 3.5 bps at 5.8975%, while the 2-year rate fell 6 bps to 6.06%. The 5-year rate was down 5.25 bps at 6.3275%.