India bond yields edge higher on record supply from states, rupee fall hurts

Indian government bond yields ended higher on Friday as states surprised the market with plans of another record debt sale in the holiday-truncated last week of the financial year.

The drop of the local currency to a record low further dented investor appetite.

The benchmark 10-year yield (IN071833G=CC) ended at 7.0927%, following its previous close of 7.0477%.

"We expect bond yields to go down from current levels, supported by falling inflation, potential rate cuts in India and globally, favourable demand-supply dynamics and global bond index inclusion," Pankaj Pathak, senior fixed income fund manager at Quantum Mutual Fund said.

States aim to raise a record 600.32 billion rupees ($7.19 billion) through bonds on Tuesday, after selling 502 billion rupees and 240 billion rupees through two separate auctions this week.

Bond supply from states this fiscal year is set to rise to an all-time high of more than 10 trillion rupees. India's fiscal year ends on March 31.

Meanwhile, U.S. bond yields continued to remain choppy with an upside bias, as recent economic data have raised concerns over the timing of rate cuts from the Federal Reserve.

The 10-year U.S. yield US10Y stayed around 4.25% in Asian hours, while the two-year U.S. yield (US2YT=RR) was at 4.6105%.

The release of recent data, including reports showing inflation is not falling as fast as hoped by Fed policymakers, has raised questions among traders about the widely expected June start to the U.S. central bank's rate cuts.

Fed Chair Jerome Powell's outlook in Wednesday's policy for price pressures was steady even after the unexpected strength in recent inflation data.

The Fed this week maintained its outlook for three rate cuts in 2024.

Traders in federal funds futures have increased their bets that the U.S. central bank will cut rates by June to 73%, according to CME Group's FedWatch tool.

($1 = 83.5049 Indian rupees)