Rise in Bond yield and its Impacts
Currently, 10- Year U.S Treasury
yield is around 1.6 percent. On 25th Feb 2021, a 10-year bond made a high of 1.614 percent and this is the highest level since 14th 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.
This would reduce the market liquidity.
ReplyDeleteprivate debt
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