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Are surging bond yields a threat to economic revival?
Summary
Govt bond yields, which serve as benchmarks for pricing debt securities, have been rising lately.Government bond yields, which serve as benchmarks for pricing debt securities, have been rising lately. Yield on India’s 10-year benchmark paper rose to a near six-month high, German Bund to an eight-month peak, and US Treasury to a near one-year top. Mint explains.
Why are bond yields rising across the globe?
In response to covid-19, central banks around the world drastically lowered interest rates and launched massive debt purchase programmes to boost borrowing and prevent bankruptcies. This drove down yields, which have an inverse relation with bond prices. The roll-out of covid vaccination has bolstered expectations of a strong recovery, fuelling bets of a spike in inflation going forward. The recent surge in yields, tracking US Treasuries, signals that investors fear central banks will soon begin to tighten rates and remove liquidity support measures to curb a potential rise in inflation as growth takes hold.
What are the economic implications of a rise?
Bond yields possess great signalling abilities about inflation trajectory and economic direction. A rise in yields indicates a rise in interest rates in the economy. Yields are also a reflection of Centre’s market borrowing to fund its expenditure. Higher yields raise borrowing costs for companies, hurting their ability to service debt and make new investments. This, in turn, crimps their profits and stock prices. This assessment was mirrored in Monday’s precipitous fall in global equities. BSE Sensex fell about 2.3%, its sharpest loss in two months and the fifth straight day of decline, as rising yields soured investor sentiments.
Why are higher yields particularly key for India?
RBI has pledged to keep rates benign and monetary policy stance accommodative. But if yields refuse to calm, they may threaten the Centre’s large borrowing programme and curb demand by making goods and services costlier. Higher US Treasury yields can also prompt capital outflows from EMs like India, pressuring the rupee and fuelling inflation.
Why is ‘taper tantrum’ being talked about?
Taper tantrum refers to a sudden surge in US Treasury yields in 2013 due to investor panic; after the Fed said it would reduce, or taper, the size of its bond-purchase programme to pump liquidity into the system rocked by the 2008 crisis. The taper talk saw foreign funds scurrying out of EMs. There are concerns that if yields in US and Europe continue to harden, investors who had borrowed cheaply to pile into high-yielding risk-assets can unwind their “carry-trade" and flock back to the safety of sovereign debt.
What is RBI doing to tame yields?
RBI has been buying bonds via OMOs to keep yields below 6%. It has also been conducting special OMOs to prevent a steepening of the yield curve. The aim is to lower long-term yields to help the Centre and firms borrow cheaply from the market. But RBI’s efforts can prove futile amid the Centre’s large borrowing aim of ₹12 trillion in FY22 , even as growth recovery and high fuel prices raise inflationary pressures. Domestic yields can also follow US Treasury yields higher if a $1.9 trillion stimulus gets Congress’ nod.
