INDIA BONDS-India 10-yr yield shy of 7%, drops to 13-month low on dovish Fed bets

By Bhakti Tambe and Dharamraj Dhutia

MUMBAI, May 3 (Reuters) - Indian government bond yields plunged on Wednesday with the benchmark yield just shy of dipping below 7% on rising bets of dovish commentary from the U.S. Federal Reserve after its policy decision later in the day.

The 10-year benchmark 7.26% 2033 bond yield ended at 7.0057%, the lowest closing level since April 7, 2022. It posted its biggest single-session drop since October 4.

The benchmark yield had closed at 7.0924% on Tuesday.

"The trend is likely to remain bullish as inflation is expected to come down in the U.S. and therefore market is aggressively pricing in rate cuts, which is having an impact on Indian bonds as well," said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

"Even if the Fed is not dovish, the upside in bond yields would remain limited, as interest rates would directionally head lower in future."

The market has already factored in a 25 basis-point rate hike by the Fed and is awaiting Chair Jerome Powell's remarks in the aftermath of the U.S. banking crisis.

U.S. yields fell sharply on strengthened bets that the Fed will reverse its rate-hiking course sooner than expected, amid a wide sell-off in regional bank stocks.

The 10-year U.S. yield was at 3.40% while the two-year yield, a closer indicator of interest rate expectations was at 3.95%. The odds of a rate cut in June are nearly 14%, while those of a rate cut in July have risen to 46%.

Some market participants also speculated demand from Housing Development Finance Corp (HDFC), after the non-banking financial company raised 150 billion rupees via a 10-year bond issue.

Traders speculated that HDFC bought 10-year and 14-year bonds. The company did not respond to Reuters' request for comment.

Traders also await the weekly debt auction through which the central government aims to raise 330 billion rupees ($4.03 billion) on Thursday, which includes 140 billion rupees of benchmark paper.

Market participants see the benchmark bond yield moving in the 6.90%-7.25% range going ahead, although it is unlikely to sustain below the key 7% handle for a longer period.

($1 = 81.8200 Indian rupees) (Reporting by Bhakti Tambe and Dharamraj Dhutia; editing by Eileen Soreng)