Bond yields dip, US jobs data eyed for next directional move

Government bond yields edged lower on Wednesday tracking a decline in their US peers on rising bets of a deeper rate cut from the Federal Reserve later in the month, while investors brace for economic data that could influence the Fed's decision.

The benchmark 10-year yield ended at 6.8579 per cent, compared with its previous close of 6.8707 per cent.

"The Federal Rate cut is widely expected in the market. The FOMC members' expectation of the trajectory of the economy will be of interest to the market participants," said Murthy Nagarajan, head of fixed income at Tata Asset Management.

The effect of Fed cutting rates could be bullish for debt markets as the interest rate differential would increase and lead to more flows, he added.

US yields dipped, with the 10-year yield moving closer to the 3.80 per cent level after economic data raised bets of a deeper rate cut by the Federal Reserve.

US manufacturing activity rose to 47.2 in August from an eight-month low of 46.8 in July, but stayed below the 50 reading to indicate contraction for the fifth straight month.

Investors have fully priced in a rate cut of 25 basis points in September, but the data pushed up expectations of a 50 bps move to 41 per cent from 30 per cent earlier this week.

US non-farm payroll data for August is due after Indian market hours on Friday, and is assumed to be the deciding trigger between a 25 bps and a 50 bps move as per traders.

Market sentiment was further supported, as the benchmark Brent crude contract tumbled to a nine-month low amid expectations that a political dispute halting Libyan exports could be resolved and concerns over lower global demand.

Lower oil prices could ease inflationary pressure in India, which is one of the largest importers of the commodity, and could see the Reserve Bank of India fastening its policy easing.