Indian Bond Yield Touch 2-Year High on Fed Hawkishness

On 06th January, the bond yields (refers to the benchmark 10-year bonds) touched a 2-year high of 6.55%. The bond yields have moved up sharply in the last on year but the spike has been very pronounced in the last few weeks. What has triggered this sharp spike in bond yields in India?

Broadly, there are 3 reasons for the bond yields hardening in India.

1) First and foremost it is about the global situation. The FED minutes make it clear that the US FED will complete the taper by March 2022 and start rate hikes immediately after that. The expectation is that the RBI may have to follow suit to avoid monetary divergence and repo rates may rise. This is reflected in higher bond yields.

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2) The second reason is the huge government borrowing program. With a fiscal deficit of 6.5% in the coming year, borrowings will be robust. Now either the government has two options. Either, it can hold rates and let the bond issues continue to devolve on the RBI. The other option is to raise coupon offered by government, but that will push up rates.

3) The third reason is persistently high inflation. The US dropped the word transitory to describe inflation. Supply chain disruptions are still the key driver of inflation in India but the government is unlikely to believe that inflation would be transitory. The idea is to take the whole sale inflation and allow higher rates to match inflation.

The government has three crucial triggers to hike repo rates but that is not happening for now if the Omicron concern plays up. The gap between what the repo rates are and what the repo rates should be, is reflected in spiking bond yields.
 

How did 10-year bond yields pan out?

If you look at the 10-year bond yields at current levels of 6.525%, they are consistently up in the last 1 year over different time frames. For example the current yield is 7.1 bps higher over last week, 13.4 bps higher over the previous month, 36.1 bps higher over the last 6 months and 63.3 bps higher if you look at the last 1 year. Clearly, the trend of yields in the last one year has been headed up.

How does the peak rate of bond yields in 2022 compare with the previous 7 years. It was only year 2021, that the maximum bond yield was lower than the current yield. In all the previous years, the maximum yield has been higher. The table captures this comparison.