Bond yields seen inching up on profit taking; Oct inflation data key

FILE PHOTO: A broker reacts while trading at his computer terminal at a stock brokerage firm in Mumbai

By Dharamraj Dhutia

MUMBAI (Reuters) - Indian government bond yields are expected to open marginally higher on Monday, as traders look to secure profit after the benchmark bond yield posted its biggest weekly drop in nine months in the previous week.

However, the moves are likely to remain capped, going into domestic retail inflation data due after the day's trading hours.

The benchmark 10-year yield is likely to be in a 7.28%-7.33% band for the session, a trader with a private bank said. The yield ended lower for a fifth straight session at 7.3069% on Friday, after tumbling 16 basis points last week.

"There is some pullback in U.S. yields, and looking at Friday's closing trend, we may see some reversal in local bond yields as well," the trader said. "Inflation figure however remains the key driver for the near term, and bonds may be in a thin range today."

Bond yields collapsed last week tracking a plunge in U.S. yields, after consumer prices cooled in October, raising speculations that Federal Reserve will slow down the pace of rate hikes.

The 10-year U.S. yield that had dropped by over 30 bps last week, rose seven bps on Monday.

The rates futures markets have now priced in an 81% chance of a 50-bps hike in December, according to the CME FedWatch Tool. The Fed has already raised rates by 375 bps since March.

India's consumer price inflation slowed in October to 6.73% on weaker food price rises and a strong base one year ago but remained stubbornly well above the 6% upper limit of the Reserve Bank of India's tolerance band, a Reuters poll predicted.

Forecasts ranged from 6.40% to 7.35%, with three-quarters of respondents expecting a figure under 7.00%, while the reading stood at 7.41% in September.

The inflation reading would provide more clarity on the local interest rate trajectory. The RBI has hiked repo rate by 190 bps to 5.90% since May.

KEY INDICATORS:

** Brent crude futures was 0.3% higher at $96.30 per barrel, after rising 2.5% in the previous session

** 10-year U.S. Treasury yield was at 3.8949% and the two-year note at 4.4098%

(Reporting by Dharamraj Dhutia; Editing by Dhanya Ann Thoppil)