Indian government bond yields are set to open higher on Tuesday, tracking consistent rise in US yields, even as sentiment remains supported after the central bank’s move to withdraw the country’s highest-value currency. The 10-year benchmark 7.26% 2033 bond yield is expected to be in the 6.98% to 7.03% range after closing at 6.9864% in the previous session.

“There should be some spillover impact of elevated US yields, especially after the benchmark was unable to break the crucial technical level of 6.98% yesterday, the trader said. US yields rose on Monday, with the 10-year yield posting its seventh consecutive rise, as investors await the outcome of debt ceiling talks between President Joe Biden and Republican House of Representatives Speaker Kevin McCarthy later in the day.

Fed officials also struck a hawkish tone in their comments on Monday, which has been the norm in the past few days and has been pushing up US yields, especially at the shorter end. While Minneapolis Federal Reserve President Neel Kashkari, said it was a “close call” on hike or pause for June, St. Louis Fed President James Bullard, said the Fed may still need to raise its rate by another half-point this year.

The 10-year US yield ended at 3.72% on Monday, jumping 32 basis points in the last seven days, while the two-year yield, a closer indicator of interest rate expectations, ended at 4.32% on Monday, gaining 41 bps during the same period. Bond yields started the week lower after the Reserve Bank of India said it would withdraw its highest denomination 2,000 rupee note from circulation, which is likely to improve banking system liquidity, bringing down recently elevated short-term rates, analysts and bankers said.

ANZ Research expects 30% to 40% of these notes in circulation, or 1 trillion rupees to 1.5 trillion rupees, to durably augment banks’ deposits and exert downward pressure on money market rates and short-end yields in the near term.

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