INDIA BONDS-Indian bond yields spike, mirroring Treasury yields, after hawkish Fed tone

By Dharamraj Dhutia

MUMBAI, Dec 19 (Reuters) - Indian government bond yields rose sharply on Thursday, with the benchmark bond yield hovering around a key par level, after the U.S. Federal Reserve flagged a slower pace of policy easing in 2025, citing sticky inflation and a stable labour market.

The 10-year bond yield was at 6.7828% as of 9:45 a.m. IST, compared with the previous close of 6.7465%. The yield had risen to 6.7867%, its highest since Nov. 29, earlier in the day.

"As expected, there was a gap down in bond prices, and with the benchmark bond at touching distance of par level, the selloff may slow down," a trader with a state-run bank said, referring to 6.79% coupon at which the bond was issued.

The trader did not, however, rule out a mild reversal in uptrend of yields as the trading session progresses. The 10-year U.S. Treasury yield crossed 4.50% mark, hitting its highest level since end of May after the policy decision and commentary from the Fed, which cut rates by 25 basis points as widely expected.

The new projections show that officials expect the core personal consumption expenditures price index to be stuck at 2.5% through 2025, significantly higher than the Fed's 2% target. The policymakers now expect only 50 basis points of rate cuts in 2025 and in 2026, according to the updated dot plot, down from 100 bps forecast in September. The odds of a pause in January have jumped to 94%, according to the CME FedWatch Tool.

Chair Jerome Powell said more reductions in borrowing costs hinge on further progress in lowering stubbornly high inflation.

"As the world steps into 2025 with U.S. tariff policies and its reciprocity ahead, we are of the view that it would hurt growth more than anything else. Thereby further uncertainty in policy guidance is not ruled out," said Siddharth Kothari, an economist with Sunidhi Securities.

Locally, investors are waiting for debt supply and minutes of the Reserve Bank of India's December meeting, both due on Friday. (Reporting by Dharamraj Dhutia; Editing by Varun H K)