Bond yields in the US have been rising steadily. The 10-year US Treasury yield has reached 1.96 percent. This is the highest in almost 3 years. Bonds in the US are called US Treasuries. Inflation figures in the US are due on Wednesday. Will tell about it in India on Thursday. There is an upward trend in bond yields before inflation data comes in.
The yield of 30-year Treasury bonds in the US also rose nearly four basis points to 2.25 per cent. In fact, bond yields are showing an upward trend around the world. “Yields are rising across the globe. This is because central banks are changing their stance on monetary policy. This is driving up interest rates,” said Priya Mishra, head (global rates strategy), TD Securities. “…Actually the market is dealing with two strictures right now. This includes the balance sheet and rate hikes,” he said.
In the US, the Labor Department is about to release inflation figures for January. This data may indicate a price rise of 0.4 per cent. This would be a jump of 7.2 per cent on a year-on-year basis. This is the highest level of inflation in the US in 40 years. Earlier job data indicated growth to be stronger than expected.
Job data is fueling speculation that the US central bank, the Federal Reserve, may be aggressive in raising interest rates. Bank of America said on Monday that the Federal Reserve could raise interest rates seven times this year. Each time he can increase the interest by a quarter percent.
What does this mean for India?
The rise in bond yields in the US has an impact on the economies of the world including India. The first impact on India will be that the selling of foreign funds in the stock market may increase. However, foreign funds are already selling in the stock markets here. This has been a major reason for the recent market decline. Foreign funds can sell in other emerging markets as well. In fact, foreign funds see an opportunity to earn good returns from investing in American bonds.
What is meant by bond yield?
Bonds are called fixed return assets. This means that the return on investment is pre-determined. Like shares, the buying and selling of bonds goes on. When demand is high, the price of a bond falls, while when demand is low, its price falls. The effect on returns due to price rise and fall is reflected in the form of yield. Secondly, there is an inverse relationship between bond price and yield. As the price of a bond falls, its yield increases, whereas when its price increases, the yield decreases. It can be understood with an example.
Suppose you have invested in a bond with a maturity of 10 years, which costs Rs 100. The interest rate on this bond is 10 percent. Even if the price of the bond falls to Rs 90 due to decrease in market demand, you will still get 10 per cent (Rs 10) interest on it. In this way the returns from this bond will increase. This is what is called Yield. Conversely, even if the bond price rises to Rs 110, you will still get 10 per cent (Rs 10) interest on it. In this way, now you are getting an interest of Rs 10 on an investment of Rs 110. In this way your return (yield) becomes less than 10 percent.
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