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MUMBAI: Indian government bond yields surged in early trades on Friday, as a constant rise in US yields hurt investor appetite for local debt.

Sentiment was cautious, as traders remained on sidelines ahead of fresh debt supply through a weekly auction, amid looming fears of an aggressive rate hike by the Indian central bank next week.

The benchmark Indian 10-year government bond yield was at 7.3821% as of 0440 GMT.

The yield ended at 7.3118% on Thursday and has cumulatively risen 20 basis points (bps) during the last seven sessions.

“Though we are not completely moving in alignment with the US, the sheer magnitude of jump in their yields is bound to have a negative impact across global yields,” trader with a state-run bank said.

“The next key level for the benchmark (bond) should be 7.40% level, but cut-off at today’s debt auction remains crucial.”

Later in the day, the Indian government is scheduled to sell bonds worth 320 billion Indian rupees ($3.94 billion), which includes the liquid five-year and 14-year notes.

The US Treasury yield curve inversion deepened further, amid widespread expectations that the Fed will to continue its hawkish stance toward hiking rates, as it battles persistently high inflation.

Indian Bond yields rise tracking US peers on hawkish Fed stance

The benchmark 10-year US Treasury yield jumped to 3.7180%, its highest level since 2011, while the two-year yield hit a fresh 15-year high of 4.1630% on Thursday.

Earlier this week, the Fed hiked interest rates by 75 bps - its third such increase - and Chairman Jerome Powell said central bank officials were “strongly resolved” to bring down inflation.

The Reserve Bank of India’s policy decision is due on Sept. 30, with many market participants expecting the central bank to deliver a 50 bps rate hike in a bid to control stubbornly high inflation.

Meanwhile, the spread between Indian and US 10-year bond yields dropped to its lowest level in 13 months.

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