Indian government bond yields were little changed early on Friday as traders awaited a large debt sale that will test demand, while oil prices and U.S. Treasury yields steadied.
The benchmark 6.94% 2036 bond yield was flat at 6.9632% at 11:10 a.m. IST. It is on track for a third consecutive weekly rise, up 5 basis points so far.
Bond yields move inversely to prices.
New Delhi will auction 320 billion rupees ($3.39 billion) of bonds later in the day, including 210 billion rupees of a new five-year benchmark.
Five-year notes have attracted strong demand in recent months, as banks likely channelled inflows from India's diaspora deposit scheme into the segment, which mobilised a larger-than-expected $127 billion.
The inflows have pushed the banking system liquidity surplus above 10 trillion rupees for the first time.
Banks proposed using foreign-exchange sell/buy swaps to gradually drain surplus rupee liquidity at a meeting with the Reserve Bank of India on Thursday.
Despite ample liquidity, bond market confidence has stayed subdued due to global risks and rising expectations of rate hikes.
Overseas debt markets remain under pressure from the escalating U.S.-Iran conflict and higher oil prices, which have revived inflation fears and heightened fiscal concerns.
Brent crude hovered near $95 a barrel in Asian trade, while the 10-year U.S. Treasury yield held above 4.75%.
"Three forces will drive markets: the September 15 to 16 FOMC meeting, crude near $95, the biggest swing factor for domestic inflation, and the pace of RBI liquidity absorption," said Alok Sharma, head of treasury at ICBC.
Federal Reserve Governor Christopher Waller said on Thursday he would support holding rates steady at the next policy meeting if incoming data confirms easing inflation pressures.
RATES
India's overnight indexed swaps fell as oil, U.S. yields steadied.
The one-year rate was down 1 bp at 5.99%, while the two-year rate and the five-year rate both fell 1.75 bps to 6.17% and 6.4675%, respectively.
