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india-bondMUMBAI: Indian federal bond yields held in a tight range on Wednesday as traders stayed on the sidelines ahead of the sale of a new 10-year paper on Friday and the outcome of the US Federal Reserve's two-day policy meeting due at around 1630 GMT.

At 11:05 a.m. (0535 GMT), the 10-year benchmark bond yield was at 8.95 percent, up 1 basis point (bp) from its previous close after moving in a narrow 3 bps range. On Tuesday, it had hit 9 percent, its highest since Aug. 22, 2008.

Total volume on the central bank's electronic trading platform was at a low 18.05 billion rupees ($365 million) compared with the usual 35-45 billion rupees dealt in the first two hours of trade on a normal day.

The benchmark five-year swap was up 1 bp at 7.40 percent, while the one-year rate rose 2 bps to 8.21 percent.

"The market is largely rangebound tracking developments in the euro and the sale of the new 10-year paper. I expect the current benchmark bond to hold in 8.90 to 9.00 percent band until the auction on Friday," the head of fixed-income trading at a private bank said.

The Reserve Bank of India said on Monday the government will sell 130 billion rupees of bonds on Friday, including 60 billion rupees of a new 10-year bond.

Traders said the announcement of a new 10-year paper would mean the existing 7.80 percent 2021 bond would gradually become less liquid, making way for the new paper to become the benchmark bond.

"The new 10-year paper was trading around 8.80 percent in the when issued market on Tuesday, so it could be sold at around those levels," said Bekxy Kuriakose, head of fixed-income trading at L&T Investment Management.

The central bank permits trading of bonds to be auctioned later in the week in the "when issued" market, which gives an indicative level at which the market sees demand for the bonds.

Traders said there would be good demand for bonds at the Friday's auction on account of the new 10-year paper. They said a fall in US yields overnight also helped sentiment along with weaker equity markets.

US Treasuries prices climbed for a third straight day on Tuesday as worries that a euro zone plan reached last week would not resolve the region's debt crisis fueled safe-haven buying of US government debt.

However, in Asian trade, the 10-year US benchmark bond yield was at 2.02 percent from 1.98 percent in late New York trade, when it had dropped 13 bps.

Asian shares fell and the euro hovered near three-week lows against the dollar on Wednesday, as investors shed riskier assets after Greece's abrupt call for a referendum rekindled fears about the viability of a European debt deal reached just last week.

Traders are also watching the outcome of the Fed's two-day policy meeting due at around 1630 GMT.

The Federal Reserve could begin to prepare financial markets for further monetary easing at the conclusion of a two-day meeting that began on Tuesday, even if it refrains from any new stimulus just yet.

The Fed will issue fresh economic forecasts at 1800 GMT, and its chairman Ben Bernanke's news conference will follow 15 minutes later.

Copyright Reuters, 2011