INDIA BONDS-India bond yields fall as US data hints Fed may pause rate hikes

By Bhakti Tambe

MUMBAI, May 11 (Reuters) - Indian government bond yields fell early on Thursday, tracking fall in U.S. yields, as U.S. inflation data increased bets of the Federal Reserve pausing interest rate hikes.

The 10-year benchmark 7.26% 2033 bond yield IN072633G=CC was at 7.0245% as of 10:07 a.m. IST, after closing at 7.0405% on Wednesday.

"A large section of the market was of a view that Fed will pause in June and inflation data has reinforced that. So, the benchmark bond yield may test 7% but don't think it may go below that immediately," a dealer with a private bank said.

Fed funds futures are currently pricing in a 94.6% likelihood of a pause in the June meeting from around 82% on Wednesday. FEDWATCH

The U.S. central bank hiked its interest rates by 25 basis points in its last policy meeting while indicating a pause in rate hikes. The Fed fund rate currently stands at 5.00-5.25%.

While the inflation data was roughly in line with estimates, U.S. Treasury yields fell on Wednesday, as it provided a relief to some investors who were concerned that price pressures may have been stronger than expected.

The 10-year U.S. benchmark bond US10YT=RR yield fell by 8 bps on Wednesday and was last at 3.4420%. The yield on two-year US2YT=RR fell below 4% and was at 3.9348%.

Market participants await local inflation data and federal debt auction on Friday for further cues.

India's inflation likely cooled to an 18-month low in April to 4.80%, below the Reserve Bank of India's upper tolerance limit for the second consecutive month, according to a Reuters poll.

The Indian government aims to raise 390 billion rupees ($4.77 billion) on Friday. The auction includes 120 billion rupees of liquid 2036 paper.

($1 = 81.7800 Indian rupees)

(Reporting by Bhakti Tambe; Editing by Varun H K)

((Bhakti.Tambe@thomsonreuters.com))