INDIA BONDS-Indian 10-year bond hits 4-month low on US debt rout

By Khushi Malhotra

MUMBAI, Sept 25 (Reuters) - Indian government bonds fell early on Friday, on course for a sixth straight weekly loss, with the benchmark 10-year yield perched at a four-month peak, as a sharp selloff in U.S. Treasuries battered sentiment before a large debt auction.

New Delhi is set to sell 340 billion rupees ($3.54 billion) of the benchmark 10-year note later in the day, testing demand in a market already pressured by policy-tightening expectations, oil-driven inflation and rising global yields.

The benchmark 6.94% 2036 bond yielded 7.1391% at 11:15 a.m. IST, its highest intraday level since May 20, after closing at 7.1067% on Thursday.

The yield was up about 7 basis points this week, after climbing more than 30 bps over the previous five weeks.

The global debt rout intensified overnight, with the U.S. 10-year Treasury yield rising above 5.20%, its highest since 2007. Japan's 10-year yield rose to 3.115%, a level last seen in August 1996, while Germany's 10-year yield, a benchmark for euro zone, hit a 17-year high of 3.5798%.

Brent crude hovered near $105 a barrel, keeping inflation risks elevated for oil-importing India, while markets weighed the possibility of a US-Iran truce. O/R

After India's August retail inflation accelerated to 4.82% and a Federal Reserve rate hike earlier this month, most market participants now expect the Reserve Bank of India to raise rates on October 7.

"An October hike looks definite," a senior state-run bank official said. "It will be a surprise if it does not happen, and yields will shoot up."

The RBI is also draining surplus liquidity through open market sales, variable rate reverse repos and sell/buy FX swaps as it readies the market for tighter policy.

Deutsche Bank said further operations were likely, while a 50-bp CRR increase remained a last-resort option.

RATES

Overnight indexed swap rates traded mixed, with the curve already heavily positioned for rate hikes, limiting upside and attracting receiving interest.

The one-year rate fell 1.25 bps to 6.16%; the two-year was flat at 6.38%; and the five-year inched up to 6.6450%.

($1 = 95.9150 Indian rupees)