Forbes India 15th Anniversary Special

Why global bond yields have risen again and how they may affect the rupee

In anticipation of a rate cut bond yields flatlined for most of 2023. The recent spike is on account of inflation expectations remaining elevated

Samar Srivastava
Published: Aug 18, 2023 04:44:27 PM IST
Updated: Aug 22, 2023 01:45:40 PM IST

Why global bond yields have risen again and how they may affect the rupeeIndian bonds have also risen but the rise has not tracked the rise in interest rate in India or globally. Image: Shutterstock  

Why have global bond yields risen in the last year?  

Since March 2022 the US Federal Reserve has increased the Fed Funds Rate taking interest rates from 0.25-0.5 percent to 5.25-5.5 percent. Bond yields in the US (and globally) tracked this rise with the US 10 year bond rising from 0.5 percent to 4.2 percent. Bond prices had peaked in October 2022 at 4.2 percent for the US 10 year before they started drifting down again in the hope that inflation was being brought under control and as the economy slowed the Fed would be forced to cut rates again.  

How have Indian bond yields reacted?  

Indian bonds have also risen but the rise has not tracked the rise in interest rate in India or globally. While the Reserve Bank of India has raised rates by 225 bps the India 10 year GSec has risen from 6.2 percent to a high of 7.4 percent. Two reasons for this are—inflation hasn’t been higher than the 4 to 6 percent we have been used to. And government finances have been well managed with the government communicating its fiscal deficit plans to the market in advance and making sure there is enough appetite for government debt. 

Also read: Why debt is juicier than equity investments today

What is the recent rise in August 2023 on account of?  

On August 16 Fed minutes showed that the Board “continued to see significant upside risks to inflation which would require further tightening of monetary policy”. This caused markets to price in another rate hike and US 10 year bond yields moved to as high as 4.3 percent. This was a significant rise from the 3.4 percent that it had fallen to in October 2022. The markets are pricing in rates staying high for longer. In India also yields moved up to 7.25 percent in tandem with global yields.  

What are the consequences of this increase in yields?  

A major consequence of the increase in yields is the rise in borrowing costs. US mortgage rates have climbed to a high of 7.09 percent, a record in this cycle. This is expected to slow housing sales. Companies may see an extended rise in borrowings for fresh loans. And lastly banks are sitting with huge mark to market losses on their bond portfolio. One estimate values Bank of America bond losses at $100 billion and total bond losses for all banks at $620 billion. 

Also read: The rising popularity of gold bonds
In India while yields have stabilised at about 7.25 percent a slide in the rupee could force the Reserve Bank of India to move rates up again even if inflation doesn’t spike, since higher yields globally would result in money moving out of India as investors prefer to invest in their own countries.  

What could cause a fall in bond yields?  

Inflation could come down due to a fall in oil and commodity prices as well as a restoration of supply chains. A slowdown in China or a US recession would bode well for a fall in global inflation as this would cause oil and commodity prices to fall, easing inflationary pressures. As of now the bond market is still pricing a rate cut in the first quarter of calendar 2024.