Mumbai: Yields on the two-year and the benchmark 10-year government securities may touch 6.6% and 7.55% respectively by end-2018 on concerns over inflation and current account deficit, coupled with the likely long pause that the central bank may adopt on the key policy rates, says a report.

The ten-year bond yields climbed to one-and-a-half year high of 7.2% in December from 6.5% in June-July this year. “Factoring in the recent sell-off and the likelihood of a weaker macro profile, we see some reason to be cautious, nudging up our end-2018 forecast for two year and 10 year yields to touch 6.60 per cent and 7.55 per cent by end-2018," Singaporean research firm DBS said in a report on Friday.

It said inflation, current account deficit, and fiscal dynamics are likely past their best phase and set to deteriorate modestly. Rising crude prices add to the headwinds for current account and inflation dynamics. The report expects further deterioration in CPI and current account dynamics. The 10-year bond yields have risen by more than 50 basis points since end-September as the market gravitates that fundamentals such as rising price pressures and a widening current account deficit have become a lot less conducive for bonds.

Headline inflation rose to a 15-month high of 4.9% in November further supporting our case that a modest rate hike cycle may be poised to begin in 2019. The price index is likely to see a further spurt in December given the high food prices.

The report said some consolidation in the government bonds market at highs is likely as much of the negativity has been priced in. Eyes are on upcoming event risks — Gujarat and Himachal election results on 18 December, the winter session of parliament that began on Friday November trade numbers, and fiscal developments, which will dictate near-term action, it said.

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