India bond yields may inch down tracking US peers; fall capped before state debt sale

MUMBAI, March 4 (Reuters) – Indian government bond yields are expected to ease slightly in early deals on Tuesday, tracking a further drag in U.S. Treasury yields, but the fall will be capped ahead of a heavier-than-scheduled supply of Indian state debt.

The benchmark 10-year yield is likely to move between 6.71% and 6.75%, a trader with a private bank said, compared with its previous close of 6.7383%.

“Bonds may see some positive bias in opening trades as there has been a large correction in Treasuries over the last few days,” the trader said.

“But the declines are likely to be countered by selling, as traders make way for a large state debt sale auction.”

Longer-dated U.S. Treasury yields fell on Monday, extending declines after the latest reading on the manufacturing sector, as a deadline for tariffs to be enacted by U.S. President Donald Trump draws closer.

Trump said 25% tariffs on goods from Mexico and Canada will take effect from Tuesday, stoking fears of a trade war in North America and sending financial markets reeling.

The benchmark 10-year U.S. Treasury note eased to the lowest level in nearly four months on Monday, and declined further in Asian hours on Tuesday.

Yields slipped after U.S. manufacturing was steady in February, but a measure of prices at the factory gate jumped to nearly a three-year high and it took longer for materials to be delivered, suggesting that tariffs on imports could soon undercut production.

Meanwhile, Indian states aim to raise 505 billion rupees ($5.78 billion) via bonds, and the quantum is over 100 billion rupees higher than as per a calendar.

States will raise another 1.35 trillion rupees through three more auctions this month.

The majority of supply from states is concentrated in the longer end of the yield curve and comes amid waning appetite for long-duration papers given the uncertainty over central bank debt purchases. KEY INDICATORS: ** Brent crude futures were down 0.7% at $71.15 per barrel, after easing 2.1% in the previous session ** Ten-year U.S. Treasury yield at 4.1418%; two-year yield at 3.9269% ** Indian states aim to raise 505 billion rupees through sale of bonds ** RBI to conduct 1-day variable rate repo auction for 250 billion rupees ($1 = 87.3290 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Mrigank Dhaniwala)