INDIA BONDS-US Fed's hawkish tone shuts door on India bond rally for now

(Updates at market open)

By Dharamraj Dhutia

MUMBAI, June 18 (Reuters) - Indian government bonds edged slightly lower in early trade on Thursday after the U.S. Federal Reserve struck a more hawkish tone than expected, with most policymakers now projecting the start of a rate-hiking cycle before year-end.

The yield on the benchmark 6.94% 2036 bond rose to 6.8639% by 10:20 a.m. IST from its previous close of 6.8626%. Yields move inversely to prices.

"Bulls will take a backseat for now, as the current levels are bound to react more to negatives, with all positives priced in," trader with a primary dealership said.

The Federal Reserve held rates steady but adopted a more hawkish stance, with policymakers signalling higher borrowing costs could be needed later this year as inflation risks persist.

The central bank also removed language suggesting further rate cuts, reflecting waning confidence in the disinflation trend.

The two-year Treasury yield, which is particularly sensitive to rate expectations jumped to four-month high, with futures pointing out a hike as early as September.

Meanwhile, oil prices remained relatively contained, with the benchmark Brent crude contract below $80 per barrel during Asian hours.

Investors awaited further clarity on the reported U.S.-Iran peace deal and the possible reopening of the Strait of Hormuz, a key global energy transit route that Iran has effectively blocked since the war started on February 28.

Underlying sentiment has turned stronger with foreign investors pouring in over $2.2 billion into Indian government bonds this month, largely after the central bank announced measures to attract dollar inflows.

RATES

India's overnight index swap rates were marginally higher tracking Treasury yields.

The one-year swap rate was at 5.89%, while the two-year rate was at 6.04%. The five-year rate was at 6.30%.

(Reporting by Dharamraj Dhutia; Editing by Rashmi Aich and Nivedita Bhattacharjee)