MUMBAI: Indian government bond yields are expected to trend higher in the early session on Wednesday amid a continued surge in U.S. yields.

The 10-year benchmark 7.18% 2033 bond yield is likely to be in the 7.21%-7.26% range, after ending at 7.2327% in the previous session, a trader with a private bank said.

“There is no strong floor to Treasury prices and at the pace at which they are rising, we will not be surprised if it hits 5% in the near future,” the trader said.

U.S. yields continued their move northwards, with the 10-year yield hovering around 4.85% in Asian hours, its highest level since August 2007, on investor worries that the Federal Reserve will hold interest rates higher for longer after strong economic data.

U.S. job openings unexpectedly increased in August, pointing to tight labour market conditions that could compel the Fed to raise rates next month.

India bond yields rise as US 10-year yield hits 16-year high

Still, the rise in yields is expected to be capped as bonds are not facing the double whammy from increasing U.S. yields and oil prices, with the latter easing slightly from highs. The benchmark Brent crude contract was at around $90 per barrel mark, after hitting a near one-year high of over $97.50 per barrel last week.

Traders also await the start of the fiscal second-half borrowing programme as India aims to borrow 6.55 trillion Indian rupees ($78.69 billion), with the first auction due on Friday. The Reserve Bank of India is also set to announce its monetary policy decision on the day.

Meanwhile, the expectations of India’s bond yield curve steepening in the second-half of the year are fading amid inflation worries, which is preventing shorter-dated yields from falling despite lower supply, traders told Reuters.