MUMBAI - Indian government bonds recovered ground on Thursday, with yields easing as optimism over inclusion of Indian bonds in global indexes outweighed the bearishness triggered by rising U.S. peers.

The benchmark 7.18% 2033 bond yield ended at 7.1443% after closing at 7.1471% on Wednesday. The yield had risen to 7.1899% earlier in the day, before easing to a low of 7.1272%.

"In the last two hours of the session, there were large buying orders from foreign banks, which took yields all the way down," a trader with a private bank said.

J.P.Morgan will likely review the composition of its emerging market bond index by early October, while a review of the FTSE global bond index is due before September-end.

"It looks like index inclusion is one of the major events that is holding up bonds and helping the sentiment… I expect bonds to remain supported till the time there is clarity on the index inclusion front," said A Prasanna, head of research at ICICI Securities Primary Dealership.

"Indian bonds seem to have delinked from U.S. Treasury movements at least on a day-to-day basis, as demand for long bonds is strong from investors and that is also helping the 10-year segment."

Short selling in bonds has also reduced and the yield spread between local and U.S. debt has narrowed ahead of global index providers' reviews on the inclusion of the country’s debt in indexes, traders added.

Earlier in the day, local bond yield rose after U.S. yields jumped after a hawkish Fed hinted at yet another rate hike in the next quarter, and that rates would be kept tighter through 2024 than previously expected.

The 10-year U.S. yield climbed to 4.45%, its highest level in 16 years, while the two-year yield rose to 5.20%, its highest in 17 years.

(Reporting by Dharamraj Dhutia; Editing by Varun H K)