Bond yields are rising rapidly in India and across global markets. The reasons go beyond changes in interest rates and include inflation, high crude oil prices, rising government borrowing, geopolitical tensions and the hawkish stance of central banks. In India, this pressure has become more evident following the RBI’s recent rate hike.
Changes in bond yields can affect government borrowing, corporate funding, bank loans, debt funds, foreign investment and the stock market. Therefore, they are an important signal not just for bond investors but for the entire financial system.
Let us understand why bond yields are rising and what this means for borrowers and investors.
What’s Happening?
India’s benchmark 10-year government bond yield has crossed 7.24%, its highest level since 13 December 2023. Before this, it had closed at 7.19%. In the current financial year, the yield has risen by nearly 21 basis points and by approximately 58 basis points since the start of the US-Iran conflict.
In August, the 10-year G-Sec yield was around 6.78–6.85%, rising to 7.21% in October. Over the past two months, it has increased by nearly 50 basis points.
Meanwhile, the RBI raised the repo rate by 25 basis points to 5.5%. Immediately after this decision, yields rose by an additional 5–10 basis points. Even before the monetary policy announcement, the entire yield curve had already risen by nearly 25–30 basis points, while yields on 3–7 year government bonds had increased by approximately 35-40 basis points.
Why Are Global Yields and Crude Increasing Pressure?
A major reason for the rise in Indian bond yields is the movement of global bond markets. The US 10-year Treasury yield has crossed 5.25%, its highest level since 2004. The 30-year US Treasury yield has also reached levels last seen after 2004. Japan’s government bond yield stood at 3.06%, while Germany’s 10-year Bund yield was nearly 3.56%.
The gap between India’s and the US’s 10-year bond yields is now less than around 2 percentage points, or 200 basis points, and is close to its lowest level in nearly 20 years. According to Jefferies, the average inflation differential between India and the US during FY07–FY16 was approximately 6.1 percentage points, which declined to nearly 1.5 percentage points in FY17–FY26.
Crude oil is also a major factor. After crossing $127 per barrel, prices fell to around $107, while Brent futures rose nearly 1.3% to above $101 and remained above $100 for most of the past month.
What Is the Impact of Rising Borrowing and Bond Prices?
Rising government borrowing and an increase in bond supply are also contributing to higher yields. The US government’s debt stands at nearly $40.11 trillion, Japan’s at $8.6 trillion, Germany’s at $3.34 trillion and India’s at approximately $2.55 trillion. Global government debt is nearly $365 trillion, equivalent to approximately 311% of global GDP of $126.3 trillion.
At the same time, data centre investment in the US exceeds $800 billion, increasing demand for capital and the US dollar. Amid pressure on the rupee, India’s forex reserves fell by a record $18.3 billion in the week ended 25 September.
Bond yields and bond prices move in opposite directions. Therefore, when yields rise, the prices of older bonds with lower coupon rates can decline. This impact is particularly noticeable in long-duration debt funds.
What Does This Mean for Investors?
For retail investors, the RBI’s rate hike does not mean that every debt fund has become attractive. In the current tight rate environment, short-duration and high-quality debt funds could be relatively better options, while long-term investors can gradually increase their exposure to longer-duration bonds as yields rise.
Companies’ borrowing costs can increase when government bond yields rise. Going forward, inflation, RBI policy, bond yields and the transmission of rate changes to bank and NBFC lending rates will remain important for investors and borrowers. High energy prices, geopolitical tensions and heavy government borrowing could keep the bond market volatile.
What’s Next?
According to Mint, Axis Mutual Fund estimates that the 10-year G-Sec yield could remain in the range of 7.10-7.40% for the rest of 2026. Over the next 6-12 months, opportunities in long-duration bonds could increase if crude oil prices fall below $75 per barrel or yields on bonds with maturities of 30 years or longer cross 7.90%.
However, the future direction will depend on crude oil prices, tensions in West Asia, the weakness of the rupee and the US Federal Reserve’s policy. These factors could keep bond yields elevated for longer than expected.
Disclaimer: This article is for educational and informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. The companies mentioned are cited as examples within the context of market developments. Investors are advised to conduct their own due diligence and consult their financial advisor before making any investment decisions.
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