Explained: Why bond yields are rising, and what it means for markets and investors

What is the News?

In India, Bond yields have risen to their highest levels in the last three years.

What are Bond and Bond Yield?

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. 

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.

Why are Bond Yields rising?

The reasons are a surge in global oil prices, high inflation and a large government borrowing programme. 

What is the impact of the rise in Bond Yields?

Impact on Government: The rise in Bond Yields means that the government will have to pay more as a yield (or return to investors), leading to a rise in the cost of borrowing. This will put upward pressure on general interest rates in the banking system.

Impact on Debt investors: Debt investors are set to get impacted. When yields rise and bond prices fall, net asset values of debt funds which hold a sizable chunk of government securities in their portfolios will also decline.

Impact on Equity Investors: Rising bond yields are generally not good news for equity investors as they raise the cost of funds for companies and start hurting their earnings. It thus leads to an outflow of funds from equities towards a less risky debt instrument. 

Source: The post is based on the article “Explained: Why bond yields are rising, and what it means for markets and investors” published in Indian Express on 10th June 2022.

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