Bond yields seen tracking U.S. peers higher on Fed rate jitters

Bond yields seen tracking U.S. peers higher on Fed rate jitters

By Dharamraj Lalit Dhutia

MUMBAI, Sept 23 (Reuters) - Indian government bond yields are expected to rise in early trading on Friday, tracking a consistent spike in U.S. yields, as investors brace for more aggressive interest rate hikes from the Federal Reserve.

Market participants are also cautious ahead of fresh debt supply through a weekly auction.

The benchmark Indian 10-year government bond yield IN072632G=CC is seen in a 7.30%-7.36% band, a trader with a private bank said. The yield ended at 7.3118% on Thursday and has risen 20 basis points (bps) in the last seven sessions.

"There is no respite from the selloff in U.S. Treasuries, and local bonds will continue to reflect similar negative trend, even though the magnitude will be less," the trader said.

"Today's cutoff and next week's central bank policy decision will act as major triggers."

The U.S. Treasuries yield curve inversion continued to deepen, as investors positioned for the Fed to continue its hawkish stance toward hiking rates as it battles persistently high inflation.

Earlier this week, the Fed hiked interest rates by 75 bps for the third consecutive time and Chairman Jerome Powell said central bank officials are "strongly resolved" to bringing down inflation.

The benchmark 10-year U.S. Treasury yield US10YT=RR jumped to 3.7180%, its highest level since 2011, earlier in the day, while the two-year yield US2YT=RR hit a fresh 15-year high of 4.1630% on Thursday.

The Fed fund futures are pricing in a 70% probability of a fourth straight 75-bps hike in November. The Fed has raised rates by 300 bps during March to September.

Most market participants are now expecting the Reserve Bank of India to deliver a 50 bps rate hike in its policy decision on Sept. 30 to control stubbornly high inflation.

Later in the day, the Indian government is set to sell bonds worth 320 billion rupees ($3.95 billion), which includes the liquid five-year and 14-year notes. KEY INDICATORS: ** Brent crude futures LCOc1 0.1% higher at $90.55 per barrel ** 10-year U.S. Treasury yield at 3.7178%, two-year note at 4.1223% ** RBI to set underwriting fees for 320 billion rupees weekly bond auction ** India to sell federal government bonds worth 320 billion rupees ** RBI to conduct 14-day variable rate reverse repo auction for 2 trillion rupees ($1 = 81.0470 Indian rupees)
Reporting by Dharamraj Lalit Dhutia; Editing by Rashmi Aich