Govt bond yields seen marginally higher, tracking US peers

The government bond yields may edge marginally higher in early trading on Monday, tracking US peers, after economic data raised expectations the Federal Reserve was likely to opt for a small rate cut at its September meeting.

The benchmark 10-year yield is likely to move between 6.85 per cent and 6.89 per cent, compared with its previous close of 6.8647 per cent, a trader with a primary dealership said.

"The US personal consumption expenditure (PCE) data scaled back the expectations of a larger rate cut and that may weigh on sentiment in the local market as well," the trader said.

The next key trigger will be the US jobs data due later this week that will determine the size of the Fed rate cut at this month's meeting. Fed Chair Powell had last month signalled a shift in the Fed's focus towards the job market.

US Treasury yields rose on Friday after the Commerce Department said the PCE price index rose 0.2 per cent in July, matching expectations of economists polled by Reuters, after an unrevised 0.1 per cent gain in June.

Markets are fully pricing in a rate cut of at least 25 basis points at the Fed's mid-September meeting. Expectations for a 50 basis point cut dipped to 30.5 per cent after the data from 34 per cent in the prior session, according to CME's FedWatch Tool Fedwatch. 

Meanwhile, the Reserve Bank of India sold government bonds from its portfolio for a seventh consecutive week, withdrawing liquidity from the banking system, according to data released on Friday.

The economic growth of the country slowed to 6.7 per cent year-on-year in the April-June quarter as a decline in government spending during national elections weighed, data showed on Friday, but it remained the world's fastest-growing major economy.