US bond yields are near multi-year highs, with the 10-year paper at around 4.8% and the 30-year at 5.3%, while Japanese yields have also risen sharply. What does this mean for global bonds, Indian interest rates and debt investors? Manish Banthia, chief investment officer (CIO), fixed income, ICICI Prudential AMC, explains
With US bond yields reaching their pre-2009 levels, do you think the era of lower interest rates is over?
We have seen bond yields rise over the last four to five years, and when bond yields rise, it results in suboptimal returns for investors. Globally, bonds have not been great assets from that perspective as yields were unusually low before 2020 and that definitely has changed. This shift has led to a general aversion to invest in bonds which we believe will change now. This is the context with which we would look at the current environment.
How can rising global yields influence India’s bond yields and interest rates?
The popular narrative is that global yields are on a one-way rise, pressuring emerging markets like India. That view misses two things.
First, global yields aren't destined to keep rising. In fact, they look more likely to fall. A lot of the ‘damage’ is already in the price. Japan's 10-year has moved from -40bps to around 3%, its 30-year has moved from around 50bps to around 4%, while inflation is still under 2%, making real yields unusually high. The US 10-year sits near 4.8%, the 30-year near 5.3%, close to 15-20 year highs, even as core inflation is flattening around 2.5%. Real yields on bonds are historically rich, while equities (S&P 500, Kospi, Nikkei) look expensive after a long bonds-to-equities rotation. That asymmetry of cheap bonds and expensive equities makes further sharp yield increases less likely than a reversal, whether triggered by a risk-off unwind in equities or a slowing US cycle.
Second, India's bond yields are increasingly a function of domestic fundamentals rather than a passive tracker of US/global yields. The historical tight correlation between dollar yields and EM (emerging market) yields has weakened meaningfully. India's yield trajectory is driven more by its own growth-inflation balance, fiscal deficit path and other economic factors than by what the US 10-year does. So even if one assumes global yields stay elevated, that wouldn't automatically mean Indian yields must rise in lockstep. The domestic macro picture is the more important swing factor.
With global yields already elevated, what can be expected from the Fed now?
The Fed’s decision on a rate hike is completely data-dependent. If the inflation print is high, it increases the probability of a rate hike. But the more important question is not whether the Fed hikes in this policy meeting, but how many hikes are likely in this cycle.
Core inflation is not accelerating, and wages are also not showing signs of acceleration. So, even if we see a hike, we could see 50-75 basis points of hikes rather than a very long rate-hike cycle. Bond yields are already close to 5%, so a lot of this is priced into markets.
What could be RBI’s stance on interest rates?
India is in a different economic cycle compared with the US. Last year, the RBI cut interest rates because the economy was slow. This year, the economy has come back, and we are growing normally again.
Fast-moving indicators, whether two-wheeler demand or bank credit growth, are showing that economic momentum is sustaining. Therefore, the RBI is likely to take interest rates back to a neutral level. We expect the RBI to hike rates by 50-100 basis points over the next one year, and whether it is done in this policy meeting or the policy after that is not too important.
If you look at bond yields, the market is already fairly pricing in 75-100 basis points of rate hikes in India over the next year. So, we don’t think the market will be surprised if RBI hikes interest rates now.
Does that mean the RBI’s policy path is largely independent of what the Fed does?
We don’t think what the Fed does is important for Indian policymakers at this juncture. The RBI will have to look at domestic fundamentals, i.e., how the growth-inflation dynamics are working through the economy, and accordingly judge whether it requires a change in its rate stance.
As far as Indian policymaking is concerned, the lens one should wear is a domestic lens, not a US Fed based lens.
Rising Japanese yields have raised concerns that money could move back to Japan and the yen carry trade could unwind. Is that a meaningful risk for Indian investors?
There are two ways of looking at it, and it remains to be seen how it will ultimately pan out.
Over the last six to 12 months, yields on long-term Japanese bonds kept rising. Normally, higher yields would attract investors, but rising yields also meant falling bond prices and losses for existing investors. That created an aversion to Japanese bonds even as yields became more attractive. At the same time, the yen continued to depreciate.
Now, both the yen and Japanese bonds look attractive, and I think money will move towards Japanese bonds.
For global markets, this creates two risks. First, the Japanese central bank is raising interest rates, and I think it will continue to do so. Against a 10-year yield of around 3%, the policy rate is still around 1%, leaving room to raise rates further. That increases the cost of the yen carry trade and, if it unwinds, could trigger a global risk-off scenario.
Second, Japanese investors have their own money invested in global assets such as US Treasuries and equities. If local bonds become relatively more attractive while the yen appreciates, some of those overseas investments could reverse.
The other way to look at this is if US is successful in orchestrating the yen appreciation in a manner in which it does not suck out global liquidity, then the same can be achieved without much market panic. Recently the US Treasury Secretary Scott Bessent spoke about the FIMA facility that can be used by BoJ which will allow BoJ to borrow from Fed rather than selling assets to intervene in the currency markets. This could largely neutralise the impact.
Could developments in global yields and a possible risk-off environment affect Indian markets?
If there is a sudden unwinding of the yen carry trade, that could create a risk off scenario globally. Over the last two years, India has not participated in the equity rally seen globally, which has largely been AI-led for many equity markets. From that perspective, we do not see India getting impacted as much. But if there is a directional global risk-off move, India could also see some impact.
For a retail investor with a debt portfolio today, where is the better risk-reward: short-duration funds, long-duration funds, or locking in yields through FDs and bonds?
For global investors, clearly, long duration is very attractive. The US 30-year and Japanese 30-year bonds are among the best assets to invest in today, in my view.
However, for an Indian investor, the short-to-medium duration assets appear to be appropriate because the Indian economic cycle is different.