Bond yields post first weekly drop in seven as U.S. yields fall

FILE PHOTO: Illustration photo of an India Rupee note

By Dharamraj Dhutia

MUMBAI (Reuters) - Indian government bond yields ended little changed on Friday but posted their first weekly drop in a holiday-truncated week, after rising for the last six, tracking a sharp decline in U.S. yields.

The benchmark Indian 10-year government bond yield ended at 7.4161% after closing at 7.4117% on Thursday.

The yield fell 10 basis points (bps) for the week, when markets were shut on Monday and Wednesday for local holidays, after having risen an aggregate 35 bps in last six weeks.

Bond yields ended higher for the day, as traders booked profits after sharp declines in the previous two sessions.

"The bond yield curve has flattened a lot in the recent past. It is quite possible that inflation remains high on the back of food and wage inflation, which will result in further rise in benchmark yield," said Sandeep Bagla, CEO Trust Mutual Fund.

U.S. Treasuries saw buying interest after data showed U.S. consumer and business spending slowed in the third quarter, pointing to a possible peak in inflation that could allow the Federal Reserve to ease its aggressive rate hikes.

The 10-year yield was at 4.01%, down 20 bps so far this week, after rising for the last 12 consecutive weeks to notch a 157-bps increase.

Fed funds futures are pricing in an 87% probability of a 75-bps rate hike on Nov. 2, and a 41% chance of a same-sized increase in December, according to CME Group's FedWatch tool. Last week, the probabilities were near 100% and 65%, respectively.

Speculation that the Fed slowing its pace of rate hikes could also result the Reserve Bank of India tempering its policy further aided sentiment.

The one-year to five-year bonds are primed for medium-term gains at current levels and investors should lock in funds, Marzban Irani, chief investment officer – debt at LIC Mutual Fund said.

"The short-end is already at its peak and is unlikely to rise from current levels. The rate hikes and tight liquidity conditions are already discounted, especially at the shorter end."

Irani expects the central bank to pause after 35 bps rate hike in December. The RBI has raised rates by 190 bps since May to control inflation.

(Reporting by Dharamraj Lalit Dhutia; Editing by Savio D'Souza)