Bond yields seen tad higher tracking U.S. peers, MPC decision key

Indian government bond yields are expected to open marginally higher on Tuesday, tracking an overnight rise in U.S. yields, while the broad market awaits the domestic monetary policy decision due on Wednesday.

The benchmark 10-year yield (IN072632G=CC) is likely to move in a 7.20%-7.25% band, a trader with a private bank said. The yield ended at 7.2254% on Monday.

We have seen resistance with 7.20% acting as the bottom. With some upmove in U.S. yields, there should be some selling today, the trader added.

U.S. Treasury prices fell on Monday as strong data on the services and manufacturing sectors, after a solid non-farm payrolls report, reinforced expectations of the U.S. Federal Reserve continuing to raise interest rates in 2023.

The inversion between the two-year and 10-year U.S. yield widened above 80 basis points (bps), which typically precedes recession.

Any large move in Indian bond yields is expected to be capped as traders await the Reserve Bank of India (RBI)-led Monetary Policy Committee's (MPC) decision.

The MPC is expected to hike rates by a smaller 35 bps to 6.25%, according to economists polled by Reuters. A strong two-thirds majority said it was still too soon for it to take its eye off inflation.

The MPC has hiked the repo rate by 190 bps since May, including three back-to-back 50-bps moves.

Retail inflation eased to a three-month low of 6.77% in October, helped by a slower rise in food prices and a higher base effect. Barclays expects the reading to ease further to 6.4% in November. The data is due on Monday.

KEY INDICATORS:

** Brent crude futures BRN1! up 0.9% to $83.45 per barrel, after easing 3.4% in the previous session

** 10-year U.S. Treasury yield US10Y was at 3.5718% and the two-year note (US2YT=RR) at 4.3811%

** Five Indian states to raise 92.50 billion rupees ($1.13 billion) through a sale of bonds

($1 = 81.8900 Indian rupees)