MUMBAI: Indian government bond yields are likely to ease further in the early session on Friday, tracking the slide in US yields following a softer inflation print, even as the focus remains on the supply of fresh debt through a weekly auction.

The benchmark 7.26% 2033 bond yield is expected to be in the 7.05%-7.10% range after ending the previous session at 7.0729%, the lowest since June 28, a trader with a primary dealership said.

“With US yields further moving away from the crucial 4% mark, there may be more buying interest being visible in the initial trading hour,” the trader said.

“Still, investor demand at these corrected yield levels would drive the markets during the day.”

US yields sustained the decline on Thursday, with the 10-year yield easing to a two-week low and the two-year dropping to levels last seen a month ago, boosting bets that the Federal Reserve will stop hiking interest rates after an expected 25 basis points increase later this month.

The Fed had paused in June but indicated two more raises in 2023.

The odds of a 25-bps hike on July 26 remain around 89%, but that of another one has come down.

Inflation registered its smallest annual increase in more than two years after rising 0.2% last month to log a gain of 3.0% for the year.

Still, surging food prices accelerated India’s June retail inflation rate to 4.81%, snapping four months of easing and higher than the revised 4.31% for May and 4.58% expected in a Reuters poll, which slightly soured the sentiment.

Indian bond yields dip as 10-year US yield falls below 4%

UBS flagged a sustained risk to food inflation over the coming months and forecast the average headline inflation to move higher towards the 5-5.5% range in July-September.

Meanwhile, New Delhi aims to raise at least 330 billion rupees ($4.02 billion) by way of a sale of bonds later in the day, and the auction includes 140 billion rupees of the benchmark note.