By Khushi Malhotra

Indian government bonds are set to open weaker early on Tuesday, extending their slide from a two-month low, as heavy state debt supply and a U.S. Treasury selloff weigh on sentiment.

The benchmark 10-year yield (IN063335G=CC) is likely to drift in a 6.55%–6.60% band, a private-bank trader said, after ending at 6.5732% on Monday, its highest level since September 30.

Bond yields rise when prices fall.

The 10-year U.S. Treasury yield US10Y was at 4.0865%, inching slightly lower in Asian hours after climbing nearly 8 basis points, tracking a selloff in Japanese and European bonds.

Meanwhile, Indian states are set to raise 313.5 billion rupees ($3.50 billion) through the sale of 4-year to 30-year bonds later in the day, well above the previously scheduled 210 billion rupees.

Market participants are on edge heading into a supply-heavy week, with sentiment already dented by fading rate cut expectations and a slumping rupee.

“All eyes are on (the central bank’s) policy, but the rupee volatility isn’t helping,” said Kruti Chheta, fund manager and fixed income analyst at Mirae Asset Investment Managers (India).

“If rupee volatility continues, then we will see the 10-year yield once again touching 6.60% levels.”

India’s economy expanded at a sharper-than-expected clip of 8.2% in the July-September quarter, while retail inflation slowed to a record-low 0.25% in October. The divergence is raising doubts about the need for the Reserve Bank of India to lower rates, analysts said.

Dimnishing hopes of a rate cut were also evident in India’s five-year overnight index swap (OIS) rate, a key gauge of long-term rate expectations, which climbed to a three-month high on Monday.

RATES

India’s overnight index swap (OIS) rates are expected to move higher on Tuesday, tracking higher U.S. Treasury yields.

The one-year OIS (INR1YMIBROIS=CC) ended at 5.4850% on Monday, while the two-year swap (INR2YMIBROIS=CC) shut at 5.5075%. The five-year rate (INR5YMIBROIS=CC) settled at 5.8050%.

KEY INDICATORS:

** Benchmark Brent crude futures BRN1! up 0.11% at $63.23 per barrel after easing 0.05% in the previous session

** Two-year U.S. Treasury yield (US2YT=RR) was at 3.5283%

($1 = 89.6340 Indian rupees)