Bond yields tad higher tracking U.S. peers in thin trading session

A man counts Indian currency notes inside a shop in Mumbai

By Bhakti Tambe and Dharamraj Dhutia

MUMBAI (Reuters) - Indian government bond yields ended marginally higher on Wednesday tracking a rise in U.S. yields, while market participation was low, with most traders staying on the sidelines ahead of quarter-end.

The 10-year benchmark bond yield ended at 7.3136%, after closing at 7.3077% on Tuesday.

"Benchmark bond yield is expected to be in a narrow 7.30%-7.35% range over the next few days, as the market is lacking any major trigger," said Ajay Manglunia, managing director and head of investment grade group at JM Financial.

The yield on the U.S. 10-year Treasury note rose on Tuesday, as investors assessed the path of interest rate hikes from the Federal Reserve, even as China continues to scale back its COVID-19 restrictions. After rising by over 11 basis points (bps) on Tuesday, the yield was last trading at 3.83%.

In a session, where there are virtually no fresh triggers, any activity in U.S. yields and oil prices will guide domestic yield movements, a trader with a primary dealership said.The rise in local yields was curbed as oil prices fell, weighed by concerns that rising COVID-19 cases in China will disrupt its economic recovery and fuel demand growth. The benchmark Brent crude contract was down 1.1% at $83.40 per barrel.

India is one of the largest importers of crude oil, and the price moves have an impact on local retail inflation.

Retail inflation eased below 6% for the first time in 2022 in November, but elevated core inflation may force the Reserve Bank of India to hike interest rate one more time in February. The central bank raised the repo rate by 225 basis points to 6.25% between May and December.

Indian debt investors should look to buy bonds along the middle of the yield curve, as it would help tide over any volatility in the backdrop of upcoming heavy debt supplies and higher interest rates, said Abhishek Bisen, head of fixed income at Kotak Mahindra AMC.

(Reporting by Bhakti Tambe and Dharamraj Dhutia; Editing by Eileen Soreng)