India bond yields seen little changed ahead of heavy state debt supply

Indian government bond yields are expected to trade around the previous session's levels on Tuesday, with the 10-year benchmark bond yield sticking close to the 6.60% mark, as traders brace for heavy supply from state governments.

The benchmark 10-year bond yield is expected to trade in the 6.55%-6.61% range till the debt auction, after ending at 6.5850% on Monday, a trader with a private bank said.

"Nothing much has changed from last week's state debt auction in terms of sentiment, so getting the auction through would definitely be a challenge," the trader said, and "Especially if large long-term investors do not do the heavy lifting."


Indian states aim to raise 316.50 billion rupees ($3.6 billion) through sale of bonds maturing in two years to 35 years later in the day.

The quantum is over 100 billion rupees more than scheduled, and if successful, this would be the highest fundraising by states through an auction this financial year.

The fresh debt supply comes at a time when investors are exhausted absorbing a continuous flow of new notes, with little clarity on the country's fiscal policy.

Bond yields have been on an uptrend after the government announced plans to cut goods and services tax (GST) rates, fuelling fears that it could borrow more in the second half of the year.

States have broadly accepted the changes but are wrangling to protect revenues. The GST council is scheduled to meet on Wednesday and Thursday.

Bond market participants will meet the central bank this week to discuss second-half borrowing. The meeting comes at a time when traders have been calling for the Reserve Bank of India's intervention to support bonds.

RATES

India's overnight index swap rates are expected to be little changed, moving higher over the last two sessions.

The one-year OIS rate ended at 5.5450%, while the two-year OIS rate ended at 5.5250%. The five-year OIS rate ended at 5.81%. KEY INDICATORS: ** Benchmark Brent crude futures were 0.4% up at $68.40 per barrel, after easing 0.1% in the previous session ** Ten-year U.S. Treasury yield was at 4.2536%; two-year yield at 3.6351% ** Indian states to raise 316.50 billion rupees via sale of bonds ($1 = 88.1950 Indian rupees).