Rising US bond yields trigger global jitters: How does it impact Indian investors? Explained

Rising US bond yields are once again emerging as a major concern for global financial markets, with investors increasingly worried that elevated crude oil prices, sticky inflation and geopolitical tensions could force central banks to keep interest rates higher for longer.

The yield on the benchmark US 10-year Treasury has climbed sharply above 4.5%, while the 30-year US bond yield recently crossed 5.1%, its highest level in years. The spike comes amid continued uncertainty surrounding the US-Iran conflict, disruption in the Strait of Hormuz and surging global crude oil prices.

The broader bond market selloff is not limited to the United States. Japan’s 30-year government bond yield also surged to its highest level since the maturity was first introduced in 1999, reflecting growing global concerns over inflation and borrowing costs.

For India, the rise in US bond yields carries significant implications because American Treasury yields effectively act as the global benchmark for interest rates and capital flows. Higher US yields generally attract global capital back toward US debt markets, reducing investor appetite for emerging markets such as India.

At the same time, India is also dealing with elevated crude oil prices, a weakening rupee and inflationary risks arising from the prolonged closure of the Strait of Hormuz — one of the world’s most important oil shipping routes.

“US 10-year government bond yields have moved aggressively from the lows of 3.95% in February-end to 4.62% this morning. US interest rates determine the global benchmarks for interest rates and also significantly influence foreign exchange markets,” said Vishal Goenka, Co-Founder of IndiaBonds.com.

The Indian rupee has already come under pressure amid the global bond market volatility. On Monday, the rupee weakened to a record low of 96.20 against the US dollar before opening weaker again at 96.38 in interbank trade.

Forex traders believe the combination of rising US Treasury yields and expensive crude oil is creating a difficult environment for emerging market currencies, including the rupee.

What rising US yields mean for India’s investors and markets

For India, the combination of rising crude oil prices and higher global bond yields presents a difficult policy challenge. Since India imports nearly 90% of its crude oil requirements, sustained increases in energy prices can worsen inflation, widen the trade deficit and pressure the rupee further.

According to Goenka, the geopolitical situation in the Middle East and its impact on crude oil prices could eventually force India to consider raising domestic interest rates in response to growing inflationary pressures. He also said retail oil-related prices have already started moving higher in recent weeks.

He added that India may eventually have to consider raising domestic interest rates if inflationary pressures continue building due to higher oil prices and imported inflation.

“Due to the Middle East geopolitical situation and its impact on oil prices, India would likely have to hike interest rates soon in the face of growing inflationary pressures. Retail oil-related prices have already started moving higher,” said Vishal Goenka, Co-Founder of IndiaBonds.com.

Historically, higher US bond yields tend to reduce foreign investor appetite for emerging markets because safer US government debt begins offering more attractive returns. This can trigger foreign fund outflows from markets such as India and increase volatility in domestic equities.

At the same time, experts believe rising interest rates globally could create opportunities for fixed-income investors in India.

“A good way to offset the impact of rising interest rates would be tax equalisation of interest income in bonds to be capped at 20%, similar to equities. This could encourage greater household participation in fixed-income investments,” suggested Goenka.

Meanwhile, according to Tata Mutual Fund, investors with shorter investment horizons may continue preferring accrual-oriented fixed-income categories such as money market, ultra-short duration and treasury funds in the current uncertain environment. Meanwhile, medium-term investors willing to tolerate volatility may still find corporate bond funds attractive because of elevated yields and improving carry opportunities.

Investors are now expected to closely monitor US inflation data, Federal Reserve commentary, oil price movements and geopolitical developments in the Middle East, as these factors are likely to determine the future trajectory of global bond yields and their impact on India’s economy and financial markets.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.