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.