India bond yields may rise, appetite weak before debt supply

By Dharamraj Dhutia

MUMBAI, Aug 28 (Reuters) -

Indian government bond yields may open with an upward bias on Thursday amid subdued investor appetite ahead of the weekly debt supply, while fiscal slippage fears and lack of support from the central bank continue to hurt.

The benchmark 10-year bond yield is expected to trade in a 6.58%-6.63% range after ending at 6.5997% on Tuesday, a trader with a private bank said. The yield ended at its highest level since March 26.

"There was some recovery towards the end of the session on Tuesday, as the market was speculating the central bank may step in to prevent the slide in bond prices, but since that has not happened, benchmark yield could again move upwards," the trader said.

Indian bond yields have been rising since the time the government announced its plans to cut goods and services tax rates. The benchmark bond yield rose to as high as 6.66% on Tuesday, a 26 basis-point rise in seven sessions.

The proposal also includes moving to a two-rate structure, which has been endorsed by a panel of ministers, fuelling fears that the government could borrow more in the second half of the year.

Bond traders are now calling for the Reserve Bank of India's intervention as a sharp drop in institutional buying has pushed yields higher, threatening to stall monetary transmission, according to market participants.

New Delhi will sell bonds worth 320 billion rupees ($3.66 billion) on Friday. The sale comes after states were unable to raise their planned quantum of funds via debt sale on Tuesday, despite paying higher-than-estimated rates.

RATES

India's overnight index swap rates are expected to witness mild paying pressure.

The one-year OIS rate closed at 5.52% on Tuesday and the two-year OIS rate ended at 5.5050%. The liquid five-year OIS rate settled at 5.7750%. KEY INDICATORS: ** Benchmark Brent crude futures were 0.7% down at $67.60 per barrel, after rising 1.2% in the previous session ** Ten-year U.S. Treasury yield was at 4.2266%; two-year yield at 3.6188% ** The RBI will auction treasury bills worth 210 billion rupees ($1 = 87.5060 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Eileen Soreng)

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