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Government Security Market Update:

The Indian government bond has taken the u-turn after the weekly sale of the last week and the yields hardened by 5 to 8 bps across the curve. The 10-year 6.33% GS 2035 which tested 6.47% in the last week rebounded to 6.55% in this week before it managed to close around 6.53%. Traders sold Debt on expectations of India-U.S. trade deal to lower current 50% tariffs on Indian goods dampening expectations of any large central bank rate cuts. India's central bank also noted in its monthly bulletin that the global economy was in flux and presented challenges to the global macroeconomic outlook, and the Indian economy was not immune. The oneyear OIS rate ended at 5.46% while the two-year closed at 5.40%. The 5-year swap rates dipped 2 bps to 5.65%. In a weekly auction the five states sold 7 to 26 years loan in the range of 6.99 to 7.3633% and in the Treasury bill auction the Reserve Bank of India sold 91; 182 & 364 DTB at a yield of 5.4593; 5.5863 & 5.5790% respectively.

The yield on the 6.33% Government bond due May 2035 rose to 6.5345% from 6.5131% last week.

Global Debt Market Update:

The U.S. 10-year Treasury yield was up 1 basis point at 3.999% after testing 3.96% in Intra-day, while the 2- year Treasury note yield was little changed at 3.48%. The 30-year bond yield gained more than 1 basis point to 4.588%. The U.S. 10-year Treasury yield fluttered around 4% on Friday as investors assessed a key September inflation reading that came in cooler than expected. The release of the price report was delayed by the three -week-old federal government shutdown. The September consumer price index rose 0.3% on a monthly basis, with the annual inflation rate at 3%. Economists polled by Dow Jones expected overall consumer prices to have increased by 0.4%, the same as the month before, putting the 12-month inflation rate at 3.1%, or 0.2 percentage points higher than the August level. Interest rate futures trading shows a nearly unanimous view that the Fed will lower rates when it convenes next week by another quarter percentage point, to 3.75% to 4.00% from a range of 4.00%-4.25% today.

Bond Market Ahead:

The U.S. Fed is all set to deliver another 25 basis points rate cut when they will meet on October 28. Cooler inflation data strengthens the case for the U.S. Federal Reserve to lower rates to safeguard the labour market. However, the ongoing government shutdown is severely impacting crucial economic data, complicating the Fed's decision-making process. Indian government bond yields are attractive compared to the emerging market and Indian 10-year is trading at a spread of 253 basis points to the U.S. 10-year Treasury yield and that tends to support demand from the domestic investors looking for carry and foreign investors if currency outlook is favourable. The trade deal (India & U.S) outcome will also set the path for the yields ahead. Currently, the inflation is not a concern for the RBI and growth outlook trajectory will plot the rate easing cycle going forward, the rate cut from the U.S. Federal Reserve will put the pressure on the RBI MPC to deliver 25 basis points cut in the repo rate when they will meet in December. Indian 10-year benchmark yield likely to ease to 6.25% by December on rate cut expectations and demand for bonds likely to boost from the domestic and foreign investors.

Bond Strategy:

* Buy 6.33 GS 2035 around 6.53 to 6.52% with a target of 6.48% and a stop loss of 6.55%.

* Buy 7.09 GS 2074 around 7.25 to 7.26% with a target of 7.18% and a stop loss of 7.30%.

SEBI Registration number is INH000000081.

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