Why is it in the news?
- Recently, on October 23, US 10-year government bond yield peaked at 5.02%, highest since July 2007. Later that day yield dropped to 4.85%.
- Increase is attributed to anticipation of the US Federal Reserve maintaining current high interest rates due to inflation concerns, particularly because of high energy prices.
- According to US Fed chair Jerome Powell, evidence of above-trend growth or tightness in the labor market could jeopardize inflation progress, possibly warranting further tightening of monetary policy and increasing bond yields.
More about the news
About Bond Yield
- Bonds are loans made by investors to borrowers for fixed periods in exchange for regular interest payments.
- Bond yield represents the annual return an investor expects over the bond’s term to maturity.
- Bond prices in secondary markets are inversely related to yields.
- Elevated bond yields can negatively impact equities.
Reasons for High Yields
- US 10-year bond yield surged by nearly 400 basis points from 1.01% in 2020.
- Causes include rising crude oil prices, inflation risks and interest rate signals from the US Federal Reserve.
- Higher government borrowing in the US is pushing yields up.
- Robust US economic data indicates a potential longer period of high rates.
- Concerns about the US government’s significant borrowing plans also play a role.
- Strong US retail sales, labor market, and inflation data have contributed to higher yields.
- Ongoing Israel-Hamas conflict is adding to global uncertainties, influencing energy prices.
- If inflation rises, investors demand higher bond yields.
Implications of Rising Yields
- Bond yields in countries, including India, historically rise with an uptrend in US yields. India’s 10-year government bond yield stands at 7.38%, marking a rise of 24 basis points in a month.
- Cost of funds in the financial system is increasing.
- Higher bond yields mean governments pay more to investors, raising borrowing costs.
- Such a rise exerts upward pressure on general interest rates in the banking system.
- Rising yields might result in capital moving from bank fixed deposits to bonds.
Impact on Bond Investors
- Rising bond yields suggest an anticipated increase in interest rates, leading investors to sell their current bonds.
- Increased interest rates lower existing bond prices, causing potential capital loss if sold before maturity.
- Net asset values of debt funds might decline due to decreased bond prices.
- Corporate bonds priced higher than government bonds will also be affected.