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Government Security Market Update:

Indian government bonds fell in early trade on Friday, led by the benchmark, as fiscal slippage fears deepened and traders braced for heavy supply at the weekly debt auction. The benchmark 10-year bond yield stood at 6.55% near this week's high of 6.56% and up from Thursday's close of 6.5278%. Bond market sentiment weakened on fears of fiscal slippage after Prime Minister Narendra Modi unveiled sweeping goods and services tax reforms last week. India plans to slash the levy by October and has proposed a move to a two-rate structure of 5% and 18%, scrapping the 12% and 28% rates in place currently, a top official said last week. New Delhi sold Rs.36,000 crore of bonds, including Rs.30,000 crore of the benchmark at a yield of 6.5553%, taking its outstanding to Rs.180000 crore and 5.91% GS 2028 at a yield of 6.0032%. Earlier in a week the nine states sold 6-31 years loan in a range of 6.95 to 7.49% and in the Treasury bill auction the Reserve Bank of India sold 91: 182 & 364 DTB at a yield of 5.4848; 5.5757 & 5.5986% respectively.

The yield on the 6.33% Government bond due May 2035 rose to 6.5510% from 6.4003% last week.

Global Debt Market Update:

U.S. Treasury yields fell on Friday after Federal Reserve Chairman Jerome Powell signaled that interest rate cuts could be on the horizon. The 10-year Treasury yield slid more than 7.5 basis points to 4.256%. The 2- year yield dropped 10 basis points to 3.69%. Powell’s dovish Jackson Hole comments suggest the Federal Reserve is ready to cut interest rates in September, which is just what investors were hoping to hear, given the recent slowdown in the labour market. Japanese 10-year government bond yields climbed to a fresh 17- year peak on Friday. The 30-year JGB yield added 2 bps to 3.20%, matching the record high from July 15. The 20-year sovereign debt yield advanced 1.5 bps to reach 2.655% for a second straight day, matching the peak from July 15, which was the highest since October 2000. The 10-year JGB yield added 1 basis point (bps) to 1.615%, the highest level since October 2008. Japan's so-called super-long yields have been under particular pressure to rise since the nation's ruling coalition lost its upper house majority last month, giving more sway to opposition parties touting consumption tax cuts. Shorter-dated debt was calmer, with the twoyear JGB yield and the five-year yield both flat at 0.855% and 1.15%, respectively.

Bond Market Ahead:

US Fed Chair Jerome Powell’s speech at the Jackson Hole symposium included subtle hints about a rate cut as soon as the next meeting in September. Powell said there was some scope for policy adjustments as the job market is weakening. Dovish tone is expected to exert pressure on the US dollar, means the Indian rupee may see an uptick and bond yields may dip. Fed’s rate cut in September will actually open the door for the RBI to follow suit in the face of slowing credit and economic growth. Foreign investors have been net buyers of Indian government bonds, positioning for easier global liquidity. That should nudge yields lower and create capital gain opportunities, especially in long duration bonds. In the recent time the spread between the Indian 10-year government bonds and US Treasury yield has widened to 225 bps which is likely to narrow to 200 bps on the recent development. The yields are very attractive at the current juncture and we may see aggressive buying in the longer duration bonds and we expect the yields to drift down to 6.42% mark in the next few days.

Bond Strategy:

* Buy 6.33% GS 2035 around 6.54 to 6.55 with a target of 6.48% and a stop loss of 6.58%

* Buy 7.34% GS 2064 around 7.33 to 7.34 with a target of 7.27% and a stop loss of 7.37%

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