India’s benchmark 10-year bond yield on Monday fell to its lowest level since May 27 to 7.355 per cent. The yield had touched as high as 7.618 per cent on June 16, which raised the cost of funds for companies and the government. It also affected stock markets.
The 10-year benchmark government securities (G-Secs) yield has so far seen a rising trend in the current calendar year 2022. The bond yield on January 1 had stood at 6.458 per cent and rose to hit 6.888 per cent by February 3. It then declined till February 18 when it touched 6.666 per cent. February-end also saw the start of the Russia-Ukraine war. Since then, the yield started witnessing a continuous upward trend till June 16 when it touch a high of 7.618 per cent. However, now, the yield on 10-year G-Secs has been seeing a downward trend since June 16. The yield on May 27 had stood at 7.351 per cent.
What It Means?
A market expert said the ease in bond yield is a positive news for the economy and the markets as the rising bond yields raises the companies’ cost of borrowing. He added that a change in the yield also prompts bankers to change their interest rates on both deposits and loans.
According to Motilal Oswal, “Bond losses are a major problem for banks as a rise in yields leads to a fall in bond prices and therefore these losses have to be booked by the banks. This could depress profits of banks and make any fund raising plans difficult.”
It added that as bond yields rise, the banks will have to raise the rates paid out on deposits to keep them attractive. But to compensate for that they are also forced to raise the lending rates to maintain their spread. It may be recollected that demonetization resulted in a glut of liquidity in the banking system bringing down yields sharply. That advantage may be nullified by the rise in yields and it may hinder the nascent recovery in the capital investment cycle.
What Investor Should Do?
Motilal Oswal said that if the bond yields go up then it means the cost of capital goes up and therefore current valuations are more depressed. That is one of the key reasons why markets have been down in the recent past.
An independent market expert said retail investors should wait for a few days to watch the movements of bond yields and equity markets. He, however, added that the fall in bond yields will positively impact corporate profitability as well as markets.
The equity markets opened with tepid gains on Monday amid mixed cues from global peers. At 09:16 IST, the Sensex was up 118.10 points or 0.22 per cent at 53,026.03, and the Nifty was up 32.80 points or 0.21 per cent at 15,784.80.
What Exactly Are Bonds And Their Yields?
A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. In India, 10-year government securities (G-Sec) is the benchmark sovereign bond. Yields are the returns on bonds. The movements of bond yields and prices are opposite to each other. When bond prices rise, yields fall and vice-versa.
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