(Reuters) - India's government bond yields settled lower on Tuesday following better-than-expected demand at the state bond auction.
However, yields moved in a narrow range throughout the day as traders exercised caution ahead of minutes of the U.S. Federal Reserve's November policy meeting, due late on Wednesday.
The benchmark Indian 10-year government bond yield ended lower at 7.285% on Tuesday after closing at 7.320% on Monday.
The cut-off yields at the state bond auction were lower than expected, indicating strong demand from investors, said Pawan Somani, head of fixed income at Knight Fintech Research.
Indian states today raised an aggregate of 149.63 billion Indian rupees ($1.83 billion) through a sale of bonds maturing between four years and 25 years. States have raised only about 70% of the notified funds so far in this financial year, as per Reserve Bank of India data.
Aggressive bids by long-term investors like pension funds and insurance companies, who have been largely absent in the secondary market, pulled down yields, traders said. That also led to government bonds yields easing, they added.
The market participants had estimated a cut-off on 12-25 year state loans in the range of 7.72%-7.76%, higher than the actual cut-off that came in the range of 7.63%-7.74%.
In addition, "some short sellers, who took advantage of shallow market activity on Monday, were covering their positions and that also put some downward pressure on yields during the day", Somani said.
Market participants now await the minutes of the Fed's November meeting to gauge its interest rate trajectory. The U.S. central bank had raised the rate by 75 basis points (bps), but slowing inflation in the U.S. has eased fears of more aggressive rate hikes.
Traders are now assigning a near 1-in-4 chance of a 75 bps hike next month and a 3-in-4 likelihood of a 50 bps increase, according to the CME FedWatch Tool.
