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Bond yields rise in Brazil, India; US central bank looks to tighten

Yields for 10-year sovereign bonds picked up sharply in Brazil and India in recent weeks, reflecting the turmoil in some emerging markets as the Federal Reserve continues raising U.S. interest rates.

The moves came as investors prepared for the Fed and the European Central Bank to announce further tightening. The Fed is up first June 13, when it will likely announce its second rate hike of the year amid an improved U.S. economic outlook. The ECB is due to meet the next day and discuss how it may exit from quantitative easing, which the Fed started doing late last year.

A stronger U.S. dollar, along with rising global interest rates, have been the "dominant drivers" of the sell-offs that emerging markets have faced in recent weeks, Institute of International Finance economist Celso Nozema wrote in a report last week.

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The trend was visible in two of the 15 largest economies in the world: India and Brazil.

The Reserve Bank of India, facing a weaker rupee, increased its benchmark rate June 6 for the first time in four years. The country's 10-year bond yields rose 36 basis points from May 8 to 7.94% as of June 8.

Brazil saw a more dramatic increase, with 10-year yields there rising 191 basis points over the month to 11.77%. The country's central bank kept its interest rate unchanged May 16 after cutting rates for months, noting that "risk appetite towards emerging economies has diminished." The central bank has also announced it would use currency swap actions to try to boost its currency, promising to step in "as long as needed," according to Reuters.

The country's economic growth prospects have also dimmed, with a nationwide strike from truckers dampening growth and the outcome of this year's elections becoming more uncertain, Bank of America Merrill Lynch's Claudio Irigoyen wrote in a research note.

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Bond yields have also spiked in Italy, though the recent political uncertainty in the country has been the major factor beyond those moves. While the country's new prime minister is ruling out an exit from the euro, his pledge for tax cuts and higher spending on social services is expected to further drive up the country's debt.

Italy's 10-year bond yields rose 124 basis points over the past month and were at 3.11% as of June 8. Their spread with 10-year German bond yields has gone up significantly, widening to 266 basis points at the end of the period. That is up from the roughly 160 basis point spread at the close of 2017.

Yields for 10-year German bonds fell 11 basis points over the month-long period, dropping to 0.45%. The U.S. also saw a dip in U.S. Treasury yields, which decreased 4 basis points to 2.93%. Other countries seeing dips in their 10-year bond yields included the UK, China and South Korea.

Japan's 10-year sovereign bonds stayed roughly flat during the month, while Russia, Australia and France saw theirs bump up.

Spain, which has a new socialist prime minister after the ouster of its previous leader, also saw its 10-year bonds yields edge up over the month, rising 14 basis points to 1.45%.

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