Context:

The Yield on 10-year government bonds in the US, the benchmark for asset prices across the globe, rose to hit 5.02 per cent.

US Government Bonds

• In India, the yield on 10-year government bonds is already at a high of 7.38 per cent, a rise of 24 basis points in the last one month.
• Historically, it was observed that bond yields in other countries, including India, rose when US yields showed any uptrend and vice versa.

What are Bonds and Bond Yields?

• Bond: It is an instrument to borrow money. A bond could be issued by a country’s government or by a company to raise funds.
  • A bond can be purchased for more than its face value, at a premium, or less than its face value, at a discount.
  • Bond Yield: It is the return an investor realizes on a bond.

Why are yields so high?

• Factors like rising crude oil prices, inflation risks and interest rate signals from the US Federal Reserve have contributed to the hardening of bond yields
• A higher government borrowing is also a reason for the rise in bond yields.

Impact on bond investors:

• Rising Interest Rates: The rise in bond yield means that investors are expecting a rise in interest rates and are therefore selling the bond papers they are holding. 
  • Since a rise in interest rates would result in decline in bond price of existing bonds (and thereby capital loss on sale before maturity), investors rush to sell those bonds so as to limit the capital loss.
• Equities: Rising bond yields could also have a cascading negative impact on equities.

News Source: The Indian Express

DOWNLOAD PDF