The yield on the US 10-year Treasury note fell to below the 3.77% mark on Wednesday, the lowest in over one year, amid increasing confidence that the Federal Reserve is due to deliver multiple rate cuts this year. Nonfarm payrolls in the US were revised downwards by nearly 820 thousand in the period between March 2023 and 2024 after the release of the Quarterly Census of Employment and Wages. The results magnified concerns that the US labor market is no longer resilient to restrictive interest rates following July’s softer-than-expected payroll count, strengthening the case for the Fed to deliver aggressive rate cuts this year. Bets of multiple rate cuts gained further traction after minutes from the Fed’s last meeting showed that the FOMC agreed that a rate cut would be appropriate in September if data is to develop as expected. Consequently, investors priced in 100bps of rate cuts by the central bank this year.
The yield on the Indian 10-year government bond was under 6.9% in August, hovering close to its lowest in over two years, as expectations of lower borrowing costs in the US and the prudent fiscal backdrop for the Indian government lifted demand for Indian fixed-income. The Indian GDP expanded 8.2% in FY2024 and PMIs have repeatedly passed the 60 threshold, while narrowing budget deficits magnified the impact of lower revenues needed to cover public expenditure, limiting the supply of bonds. This drove foreign funds to pile on Indian debt since last year, lastly underscored by the inclusion of Indian G-Secs in JPMorgan’s emerging market index. In the meantime, India tightened restrictions on foreign bond buying in 14 and 30-year G-Secs, but exchanges continued to note wide net foreign inflows at the start of August.
Meanwhile, dollar weakened against most currencies. The Euro strengthened to over $1.117, its highest level since July 2023, as expectations of a Fed rate cut weakened the US dollar. The latest Federal Reserve minutes suggested a likely interest rate reduction in September, with some speculation that it could be as large as 50 basis points due to recent nonfarm payroll revisions. In Europe, markets are awaiting key economic data that could influence the European Central Bank's decisions, with expectations of around 65 basis points in rate cuts by the ECB in 2024.
