Bond yields seen higher tracking U.S. peers

By Dharamraj Lalit Dhutia

MUMBAI, Sept 28 (Reuters) - Indian government bond yields are expected to open higher on Wednesday after the 10-year U.S. Treasury yield hit 4% for the first time since April 2010, as nervousness over high policy interest rates persisted.

However, traders ruled out any major spike in yields, as they remain hopeful of India's inclusion in global bond indexes.

The benchmark Indian 10-year government bond yield IN072632G=CC is seen in a 7.26%-7.32% band, a trader with a private bank said. The yield fell seven basis points and ended at 7.2915% on Tuesday.

"There are too many moving factors at the moment, which are having their impact on bonds," the trader said.

"Prima facie, just looking at the U.S. yields, local bond yields should have been way higher than what they are currently, but strong speculation over inclusion is acting as a solid support."

In the previous session, bond had yields eased, as investors expected a decision on inclusion of Indian debt into global bond indexes in the near term.

On Tuesday, a Reuters report said the development was likely only early next year, as New Delhi still needs to address various operational issues.

Meanwhile, U.S. yields continued their upward momentum, with the 10-year yield US10YT=RR hitting 4% on Wednesday, its highest level since April 2010, as investors braced for higher interest rates that could possibly remain longer than anticipated.

The two-year yield US2YT=RR was close to its highest level in 15 years.

Last week, the Federal Reserve hiked interest rates by 75 bps for the third consecutive time and Fed Chair Jerome Powell said central bank officials were "strongly resolved" to bringing down inflation.

The Reserve Bank of India's policy decision is due on Friday, with 26 of 51 economists in a Reuters poll predicting a 50-basis-point hike, which would take the repo rate to 5.90%.

The RBI has already raised rates by 140 basis points between May and August to tackle inflation that has stayed above the central bank's tolerance level for eight straight months to August. KEY INDICATORS: ** Brent crude futures LCOc1 1.4% lower at $85.10 per barrel, after rising 2.6% in previous session ** 10-year U.S. Treasury yield at 4.0004%, two-year note at 4.3015% ** Reserve Bank of India to auction Treasury Bills worth 210 billion Indian rupees ($2.57 billion) ($1 = 81.7050 Indian rupees)
Reporting by Dharamraj Lalit Dhutia; Editing by Neha Arora

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