By Dharamraj Dhutia
MUMBAI, Nov 3 (Reuters) – Indian government bond yields are expected to trend higher in early trades on Thursday, tracking their U.S. peers, after the U.S. Federal Reserve stuck to its hawkish tone on monetary policy, dampening hopes of a moderation in rate hikes.
The benchmark 10-year yield is likely to be in a 7.41%-7.46% band, a trader with a private bank said. The yield ended at 7.4044% on Wednesday.
“There was an initial dovish reading of the Fed’s statement, but (Fed Chair Jerome) Powell made it amply clear in his remarks at the press conference that there will still be more rate hikes, even though 75 bps moves are less likely to be repeated,” the trader said.
The Fed raised interest rates by 75 basis points, as expected, on Wednesday and said its battle against inflation will require borrowing costs to rise further.
Powell said even if policymakers do scale back future hikes, they were still undecided about just how high rates would need to rise to curb inflation and were determined to stay the course until the job is done.
Regardless of how fast the Fed moves, “there’s some ground to cover” for the target federal funds rate to reach a “sufficiently restrictive” level that will slow inflation, Powell said. The final destination is “very uncertain … We’re going to find it over time.”
The 10-year U.S. yield rose above 4.10%, but the two-year U.S. yield, which is a more direct indicator of interest rate expectations, rose closer to its highest level in over 15 years.
The Fed funds futures are now pricing in 66% chance of a 50-bps hike in December and a 34% chance of yet another 75-bps move, according to CME Group’s FedWatch tool.
Traders will also focus on the outcome of the Reserve Bank of India’s special meeting later in the day, called to discuss the central bank’s response to the government after failing to meet its inflation target for three straight quarters.
The central bank will not immediately release details of its written response as it does not have the authority to do so, Governor Shaktikanta Das said on Wednesday.
KEY INDICATORS:
** Brent crude futures was 0.5% lower at $95.70 per barrel, after rising 1.6% in previous session
** 10-year U.S. Treasury yield was at 4.1151% and the two-year note at 4.6301%
** RBI’s additional monetary policy committee meeting (Reporting by Dharamraj Lalit Dhutia Editing by)
