(Reuters) - Indian government bond yields are likely to trend higher in the early session on Wednesday, as the Indian and U.S. central banks are on track to continue their rate hike cycle.
The 10-year benchmark 7.26% 2032 bond yield is expected to stay in the 7.36%-7.42% band after closing higher at 7.3841% on Tuesday, a trader with a private bank said.
"Bond yields should see some selling pressure, as U.S. yields are off their lows, and as we move closer to more rate hikes," the trader said. The U.S. Treasury yields recovered to end higher on Tuesday, and continued their momentum on Wednesday after February's stubbornly high inflation print.
The two-year yield, which had dropped over 100 basis points (bps) in three sessions to Monday, rose 20 bps on Tuesday and added another 5 bps on Wednesday, while the 10-year yield rose 12 bps on Tuesday.
The inflation print has brought back focus on the interest rate hike by the Federal Reserve next week, despite concerns about liquidity in the banking sector.
The Fed funds futures are now pricing in an 81% chance for a 25-bps hike in March, and 19% for rates being left unchanged.
At home, India's retail inflation was at 6.44% in February, remaining above the Reserve Bank of India's target for the second month, cementing bets of another rate hike in April.
Meanwhile, the fixed-income and foreign-exchange markets are unlikely to see any major fallout after the collapse of Silicon Valley Bank, said Ashhish Vaidya, head of treasury and markets at DBS Bank India, who expects an outside chance of another rate hike in April.
