By Dharamraj Dhutia

Indian government bonds are expected to extend their upward momentum in early trading on Friday, after a weak U.S. jobs report eased fears of immediate rate hikes, while persistent foreign purchases further supported sentiment.

The benchmark 6.94% 2036 bond yield (IN069436G=CC) is expected to trade between 6.70% and 6.75%, a private bank trader said, after closing at 6.7180% on Thursday. Bond yields move inversely to prices.

The rally could be capped as traders await fresh debt supply, with New Delhi eyeing a 340 billion rupee ($3.56 billion) raise through an auction of the benchmark 2036 bond, which will take its outstanding issuance beyond one trillion rupees.

"Bulls are dominating the market, and we should see another attempt for the breach of 6.70% on the benchmark," the trader said.

"Demand at auction holds the key, and if there are large purchases from foreign investors, we could see the 10-year yield bursting through the 6.70% handle."

U.S. Treasury yields pulled back slightly from earlier highs on Thursday, after data showed nonfarm payrolls increased by 57,000 jobs last month, well below the 110,000 estimate of economists, and after a downwardly revised 129,000 in May.

The data cooled expectations for a near-term rate hike by the Federal Reserve, with the probability of such a move in September easing to 53%, down from 63% a day ago.

Meanwhile, relentless foreign purchases will support bullish moves, with these investors buying almost $500 million of debt in the first two days of July, following a record monthly purchase of $3.1 billion in June.

Inflows under the Fully Accessible Route continue after New Delhi and the RBI announced measures to attract foreign capital and support the rupee, boosting chances of domestic bonds being included in Bloomberg's Global Aggregate Index.

RATES

India's overnight index swap rates may see receiving interest as U.S. data pulls down Treasury yields.

The one-year (INR1YMIBROIS=CC) rate ended at 5.7850%, while the two-year swap (INR2YMIBROIS=CC) rate closed at 5.93%. The five-year (INR5YMIBROIS=CC) rate settled at 6.1975%.

($1 = 95.3900 Indian rupees)