Yields on the benchmark 10-year bond on Tuesday jumped to a three-week high of 7.46 per cent in intra-day trades as crude oil prices rose above $120 per barrel after the European Union agreed to cut oil imports from Russia by the end of 2022.

The renewed rise in crude oil prices has led to fresh concerns that inflation which is already at 8-year highs will continue to accelerate, necessitating the Reserve Bank of India (RBI) to raise interest rates longer than required.

Analysts said oil prices are likely to remain firm amid tight supplies following the European ban on Russian oil. An energy analyst at DBS Bank told Reuters that oil prices could move even beyond the $130 per barrel mark.

Worries over rising inflation and a slowdown or even a recession also impacted US treasuries with yields on the 10-year note rising to nearly 2.86 per cent against the last close of 2.74 per cent.

There was more bad news from Europe: inflation in the eurozone — comprising the 19 countries which use the currency — rose to a record 8.1 per cent in May from 7.4 per cent in the previous month because of rising energy prices.

At the domestic bond markets, yields — they are inversely related to prices — on the 10-year paper on Tuesday rose to 7.46 per cent on these developments — the highest since May 9 when it had touched 7.49 per cent.

However, it softened towards close and ended at 7.41 per cent against the previous close of 7.40 per cent.

Bond yields did not hit the roof even after the RBI’s surprise 40 basis points hike in the repo rate earlier this month because of expectations of support from the central bank and early monsoon arrival.

On Tuesday, the IMD said that the Southwest monsoon will be normal at 103 per cent of the long period average.

Meanwhile, in the currency markets the rupee slipped 10 paise to end at 77.64 to the dollar. The domestic currency opened at at 77.65 and traded within the range of 77.6200-77.6950.

According to a note from IFA Global, the risk appetite across markets have strengthened tentatively.

The US Dollar Index bounced off the monthly low to regain the 102 level. However, elevated crude oil prices is weighing on the rupee because of India’s heavy reliance on energy imports.

In stocks, market benchmarks wilted under selling pressure on Tuesday after a three-day rally as participants took money off the table amid surging oil prices and weak European equities.

Investors were also cautious ahead of release of GDP data, while a depreciating rupee further weighed on sentiment, traders said.

Oil prices extended a bull run on Tuesday after the European Union agreed to a partial and phased ban on Russian oil and China decided to lift some Covid-19 restrictions and the U.S. summer driving season kicked off.

Brent crude for July, which expires on Tuesday, rose $2.13, or 1.8 per cent, to $123.80 a barrel by 11:05 a.m. ET (1505 GMT).