INDIA BONDS-India bond market eyes fresh supply, early moves seen muted

By Dharamraj Dhutia

MUMBAI, Dec 12 (Reuters) - Indian government bonds are expected to be little changed in early deals on Friday, as market participants await fresh debt supply at a time when demand-supply dynamics have turned unfavourable.

The benchmark 10-year yield IN064835G=CC is likely to drift in a 6.55% to 6.60% band, a trader with a private bank said. It ended at 6.5832% on Thursday. Bond yields rise when prices fall.

New Delhi will raise an aggregate of 280 billion rupees ($3.10 billion) through the sale of 15-year and 40-year bonds later in the day.

"Demand at the auction would be the real test to understand whether the rally that we saw yesterday has any strong legs to sustain," the trader said.

Bond yields declined on Thursday after the U.S. Federal Reserve reduced rates by 25 basis points which was expected. Still, the Fed's commentary was less hawkish than feared, leading to some cheer in an otherwise battered bond market.

Bonds also received a boost after the Reserve Bank of India bought bonds at an open market operation at cutoff prices that were higher than estimates.

The central bank's bond buying this financial year has reached a record high, with at least 500 billion rupees in purchases scheduled for Thursday.

With the RBI's focus on six- to seven-year bonds at its first purchase, traders grew confident that the central bank could include the liquid 6.33% 2035 bond in next week's OMO.

Bond yields rose in the first three days of the week, tracking a sharp jump in overnight index swap rates as offshore investors unwound receive positions on bets India's rate-cut cycle has ended.

RATES

India's overnight index swap rates may move sideways after dipping slightly in the previous session.

The one-year OIS INR1YMIBROIS=CC rate fell to 5.4650% and the two-year swap INR2YMIBROIS=CC dipped to 5.56%. The five-year OIS rate INR5YMIBROIS=CC settled nearly four bps down at 5.92%.

KEY INDICATORS:

** Benchmark Brent crude futures LCOc1 up 0.7% at $61.70 per barrel after easing 1.5% in the previous session

** Two-year U.S. Treasury yield US2YT=RR at 3.5279%, 10-year U.S. Treasury yield US10YT=RR at 4.1527%

** India to auction sovereign bonds worth 280 billion rupees

** RBI to set underwriting fees for sovereign bond auction worth 280 billion rupees

($1 = 90.2540 Indian rupees)

(Reporting by Dharamraj Dhutia; Editing by Rashmi Aich)

((Dharamraj.dhutia@tr.com))