Bond Yields Fall On 10-Year U.S. Yield's Drop Below 4%, Subdued Oil

Indian government bond yields ended lower on Tuesday as the 10-year U.S. yield eased below 4% again, while oil prices remain subdued.

The focus remains on U.S. Federal Reserve as well as the Reserve Bank of India's meetings later this week.

The benchmark 10-year Indian government bond yield ended at 7.3957%, after rising five basis points (bps) to 7.4454% on Monday.

"U.S. yields have come off and this indicates that investors are not very worried over the Fed decision and hence Indian yields have also come down," said Anuj Bhala, head of rates trading at SBM Bank (India).

"Better local economic data as well as lower oil prices, all are aiding sentiment."

The 10-year U.S. Treasury yield was trading at 3.9571%, after hitting 4.11% on Monday.

The Fed's policy decision is due on Wednesday, with broad expectations of a fourth consecutive 75-bps rate hike. However, its outlook and commentary will be key.

Fed funds futures are pricing in an 86% chance of another 75-bps rate hike on Wednesday, with only a 46% chance of a same-sized increase in December, according to CME Group's FedWatch tool.

The benchmark Brent crude contract has stayed below $95 per barrel and traders expect a further decline as more extensive COVID-19 curbs in China raised fears of slowing fuel demand in the world's second-largest oil consumer.

India is one of the largest importers of crude oil and the price moves have a direct impact on inflation.

Traders are also awaiting the outcome of the RBI's monetary policy meeting on Thursday, which, Reuters reported, was most likely to discuss the central bank's response to the government after failing to meet its inflation target for three quarters in a row.

India's Goods and Services Tax mop up was 1.52 trillion rupees in October, the second-highest monthly collection since GST was introduced in 2018. It stood at 1.48 trillion rupees in September and 1.30 trillion rupees in October 2021.

Meanwhile, India's fiscal deficit in the first half of the financial year rose to 6.20 trillion rupees, touching 37.3% of annual estimates.