India bond yields dip tracking U.S. peers, flatlines for week

Indian government bond yields ended lower on Friday, mirroring the drop in U.S. yields, while markets awaited U.S. non-farm payroll data, due later in the day.

The 10-year benchmark 7.26% 2032 bond yield ended at 7.4321%, after closing at 7.4449% on Thursday. The yield rose one basis point (bps) for the week.

"Domestic yields were lower following the sharp decline in U.S. yields. Traders stayed light ahead of non-farm payrolls data," said V.R.C. Reddy, treasury head of Karur Vysya Bank.

U.S. yields fell on Thursday and Friday as risk appetite weakened after an equities selloff and as data showed U.S. initial jobless claims rose more than expected last week.

The yield on two-year bonds dropped by 25 bps to 4.82% since Wednesday's close, while that on the 10-year paper fell 12 bps to 3.85%.

Traders now await the jobs report, which is expected to show an increase of 205,000 in February, according to a Reuters survey of economists.

A softening job market could calm the fears of an aggressive rate hike by the Federal Reserve. Fed funds futures are now pricing in a 52% chance for a 50 bps hike in March, down from 68% after Chair Jerome Powell's comments.

The jobs data will be followed by retail inflation readings in India and the United States on Tuesday.

A Reuters poll showed retail inflation in India likely eased to 6.35% last month but stayed above the Reserve Bank of India's (RBI) upper tolerance limit for a second straight month. The RBI is likely to increase it by 25 bps in April.

Meanwhile, investors should start investing in longer-duration bonds and funds that could offer better returns in the medium term, said Parijat Agrawal, head of fixed income at Union Asset Management.

"The absolute yield levels are high today, and as rates come down, longer-duration funds are expected to be attractive on account of high accruals and mark-to-market gains." (Reporting by Dharamraj Dhutia; Editing by Dhanya Ann Thoppil and Janane Venkatraman)