Summary of this article
India bond yields rose to over 2-year highs as US yields surged
Bonds were already under pressure due to rupee and crude oil prices
Indian bonds have been falling over the past year or so as global markets are rattled by prolonged geopolitical uncertainty. In addition to this higher bond supply from the government and concerns of an impending monetary policy tightening domestically, investors have also grown sour on the bond market despite the high volatility in equity markets.
The 10-year benchmark government bond (G-Sec) yield has climbed to 7.12 per cent on May 20 as a combination of global and domestic factors kept investors risk-averse. The 10-year bond yield had climbed to 7.14 per cent on May 18, the highest level seen in over two years. Bond yields move opposite to prices, meaning Indian bond prices fall as yields rise.
The recent trigger was due to the sharp rise in US Treasury yields, which is making American debt more attractive to global investors. The selloff in US bonds has also weakened the Indian rupee and added to worries around inflation and foreign fund outflows. This has led investors to become increasingly cautious about holding emerging-market debt because returns in the US are now rising rapidly.
Investors are demanding higher returns in US Treasury bonds due to fears of persistent inflation and possible interest rate hikes by the US Federal Reserve. The 30-year US Treasury yield recently crossed 5 per cent, its highest level since 2007, while the 10-year yield climbed above 4.6 per cent.
Higher US yields tend to reduce the appeal of riskier assets in emerging markets like India. As the interest rate differential between the safe haven asset and the emerging market bonds reduces, foreign investors tend to move money toward safer US assets when returns there become more attractive. This shift affects Indian bonds, equities, and the rupee at the same time.
Market participants are also worried that sticky inflation in the US may force the Federal Reserve to keep rates higher for longer or even consider another rate hike. That possibility has triggered a global bond market selloff, with investors dumping government debt across several countries.
The rupee has already weakened sharply and recently touched record lows against the dollar. Analysts said rising crude oil prices and geopolitical tensions in West Asia are worsening the situation. India imports most of its crude oil needs, so expensive oil increases inflation risks and widens the country’s trade deficit.
Traders believe the Reserve Bank of India (RBI) may need to continue supporting the bond market through liquidity measures or bond purchases if volatility increases further. However, the RBI’s ability to aggressively cut rates could remain limited if imported inflation from oil and a weak rupee continues to rise.
“Markets are increasingly worried that higher energy prices could keep inflation elevated for longer. For India, persistently high crude prices raise imported inflation risks, reducing the RBI’s flexibility on rate cuts. At this stage, bond markets are signalling caution, with yields likely to stay elevated until geopolitical tensions ease and inflation expectations stabilise,” Saurav Ghosh, co-founder of online bond platform Jiraaf, said.
