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MUMBAI: India’s benchmark government bond yields rose to near three-month highs on Tuesday, as heightened geopolitical tensions and expectation the Federal Reserve will wait longer to cut interest rates hurt demand.

The yield on the Indian 10-year bond was at 7.1890% as of 10:15 a.m. IST, the highest since Jan. 25, after closing at 7.1779% in the previous session.

“If the escalation in the Middle East continues, then the benchmark yield may test 7.20% and then 7.25% as the market is bracing for higher for longer US interest rates,” a bond dealer at a foreign bank said.

Oil prices rose on Tuesday after Israel’s military chief said his country would respond to Iran’s weekend missile and drone attack.

The price of the commodity had eased on Monday after Iran’s attack proved to be less damaging than anticipated, easing concerns of a quickly intensifying conflict that could displace crude barrels.

Higher oil prices could impact India’s retail inflation, which eased in March. Economists already think that an India interest rate cut is still some months away.

Indian benchmark yield holds around 7.08% as FY nears end

The benchmark US 10-year Treasury yield hit five-month highs on Monday after stronger-than-expected retail sales data suggested the Fed could delay cutting interest rates this year.

The hotter-than-expected reading - in which retail sales rose 0.7% last month - suggested inflation remains stickier than markets had expected.

Futures markets are now pricing in 44 basis points (bps) of rate cuts by the end of December, down from over 160 bps expected at the start of the year.

Markets now expect the first rate cut in September, according to CME’s FedWatch Tool.

On Tuesday, two Indian states aim to raise an aggregate of 19 billion rupees ($227.54 million) by selling bonds.

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