Bond yields seen higher but crude price fall may cap move

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MUMBAI — Indian government bond yields are expected to rise in early trading on Tuesday, in tandem with U.S. yields, although the slide in oil prices could cap the increase.

The benchmark Indian 10-year government bond yield is seen in a 7.35%-7.40% band, a trader with a private bank said. The yield ended at 7.3643% on Monday.

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“We may see some negative reaction at open, but any large selloff is unlikely,” the trader said. “Oil has also come down sharply to levels which is lower than central bank’s expectations, so that should help.”

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Oil prices fell on Monday, with the benchmark Brent crude contract settling at a nine-month low, pressured by a strengthening dollar as market participants awaited details on new sanctions on Russia.

The contract has dropped more than 7% in the last two sessions. Easing oil prices aid India’s inflation outlook as the nation imports bulk of its oil requirement.

The U.S. Treasury yield curve inversion continued to deepen, and yields hit fresh highs on Monday, amid concerns that central banks globally will keep tightening monetary policy to curb stubbornly high inflation.

The 10-year U.S. yield jumped above 3.93%, its highest level in more than 12 years, while the two-year yield continued to trade near levels seen in 2007.

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Last week, the Federal Reserve hiked interest rates by 75 bps for the third consecutive time and Chairman 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, taking the repo rate to 5.90%. Another 20 predicted a 35 bps increase.

India’s inflation rose to 7% in August and has stayed above the central bank’s upper tolerance level for eight straight months to August. KEY INDICATORS: ** Brent crude futures 0.4% higher at $84.42 per barrel, after easing 2.4% in previous session ** 10-year U.S. Treasury yield at 3.8778%, two-year note at 4.3118% ** Fourteen Indian states to raise 277.36 billion Indian rupees ($3.40 billion) via sale of bonds ($1 = 81.6100 Indian rupees) (Reporting by Dharamraj Lalit Dhutia; Editing by Savio D’Souza)