Updates at market open

By Khushi Malhotra

MUMBAI, May 29 (Reuters) - Indian government bonds edged higher early on Friday, tracking U.S. Treasuries as oil prices fell after the U.S. and Iran extended their ceasefire, though gains were capped by a weekly debt auction.

The benchmark 6.48% 2035 bond yield IN064835G=CC stood at 6.9905% at 10:55 a.m. IST, versus Wednesday's close of 6.9960%. Indian markets were shut on Thursday for a local holiday.

The 10-year yield is headed for its biggest weekly decline in eight weeks.

The United States and Iran agreed on Thursday to extend their ceasefire by 60 days, sources told Reuters, though U.S. President Donald Trump has yet to approve the deal and Iranian state media said it was not finalized.

Benchmark Brent Crude futures have eased 10% so far this week and was last at $92.69 per dollar. The 10-year US treasury yield was at 4.44%, down 1.4 bps on the day and over 13 bps this week.

Lower oil prices helps importer India as cheaper oil can ease inflation and reduce pressure on the rupee.

Domestically, traders held off on directional bets ahead of New Delhi's 280-billion-rupee ($2.93 billion) debt sale later in the day and the Reserve Bank of India's policy decision on June 5.

"We expect the RBI to hold rates at the upcoming policy meeting, and fears of an immediate hike have eased. If crude stays around current levels, bonds could rally another 5-6 bps," a trader at a primary dealership said.

While some domestic investors leaned toward a pause, major foreign lenders including Standard Chartered, ANZ, MUFG and OCBC, are expecting a hike.

RATES

India's overnight index swap rates eased tracking oil, US Treasury yields.

The one-year swap INR1YMIBROIS=CC was down 2 bps at 6.08%, while the two-year rate dropped 3 bps to 6.26%. The five-year rate INR5YMIBROIS=CC fell 3 bps to 6.5825%.

($1 = 95.6800 Indian rupees)