Rise in Bond yield and its Impacts

Currently, 10- Year U.S Treasury yield is around 1.6 percent. On 25^th Feb 2021, a 10-year bond made a high of 1.614 percent and this is the highest level since 14^th Feb 2020. The yield of a 30-year bond rose to 2.28 percent.

 

As we can see in the above chart from Dec 2020 levels, yield rates rose by 80 bps points.  In India, the 10-year Bond rate climbed to 6.20.

How Bond Yield Effect Government Borrowings?

Bonds are basically loans taken by a corporation or Government and investors receive principal at the end of the bond period. When Bond Yields rise then RBI needs to provide higher yields to investors. Recently when there was Single day rise of 10 Basis points RBI had to reject the bids because investors were looking for high yields.

During the Budget, session the Government announced that they are looking to borrow 12 lakh crores during the upcoming financial year. Usually, Government borrowing cost is used as the benchmark for pricing interest rates for loans given to Businesses and Individuals. So, rising borrowing costs for the government will have an impact on real economy as well.

What Happens to investments when Bond Yield Rises?

Investors usually worry that increase in Bond yields and increasing long term interest rates will reduce the liquidity in the market because as the Risk-free rate increases investors who are risk-averse try to look for less risky opportunities and move their investments from the capital markets.

Another situation rising interest rates can create is the cost of borrowing for the companies would be increased and that would reduce their net income and that reduces Earning per share and fewer dividend payouts. This means that Investors may be interested to invest in this entity compared to previous levels.

When Yield rates are rising basically new bonds pay higher coupon amount while compared to the old and existing bonds and this makes the price for old bonds to go down and they are further sold at Discount.

The Rise in US yield rates concerns the investors because the Foreign institutional investors will move their money from emerging markets and try to invest in less risky opportunities and stable opportunities. This would reduce the market liquidity.

Coming to an exchange rate point of view with FIIs reducing investments the demand for the Indian rupee would be less in global markets and that would lead to rupee depreciation.

-Abhiram Lagishetty

TAMPMI

PGDM-BKFS