(Updates at market open) By Dharamraj Dhutia MUMBAI, Oct 17 (Reuters) – Indian government bonds rallied in early deals on Friday, as bond bulls turned active after U.S. Treasury yields plunged, with the 10-year yield collapsing to its lowest level in six months. Still, a move past the key level stayed elusive, and any large drop in local yields was capped ahead of a fresh supply of debt through the weekly auction. The yield on the benchmark 10-year note was at 6.4766% as of 10:00 a.m. IST, after closing at 6.5000% on Thursday. Bond yields move inversely to prices. New Delhi will sell bonds worth 300 billion rupees ($3.42 billion), including 180 billion rupees of the liquid five-year bond. U.S. Treasury yields dropped overnight, as concerns over trade tensions between the U.S. and China, along with credit market worries, curbed the appetite for riskier assets. The two-year yield dropped to its lowest level in three years, while the 10-year bond yield fell to its lowest level in six months. The yields were around 3.40% and 3.95%, respectively. "There is some positive momentum due to Treasuries, but for the break of 6.48%, convincingly, we need to see very aggressive demand at the debt sale," a trader with a primary dealership said. Bonds witnessed an end to their three-day winning streak on Thursday, yields closing higher, after the minutes of the Reserve Bank of India's latest meeting were in line with estimates. Earlier this month, the RBI held interest rates, while two members of the rate panel favoured a change in stance to "accommodative" from "neutral". RATES India's overnight index swaps (OIS) witnessed heavy receiving interest, as the chances of a Federal Reserve rate cut received a further boost and as U.S. yields plummeted. The one-year OIS rate was down 3 basis points to 5.40% and the two-year rate was down 4 bps at 5.34%. The five-year swap rate also fell 4 bps to 5.58%. ($1 = 87.7700 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Rashmi Aich and Janane Venkatraman)
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