Increasing returns on government securities or bonds are an alarming concern in the United States and India. This can pessimistically impact the stock market.
Read more: Electoral Bonds Scheme
The yield on 10-year bonds in India had risen up to 6.20% from a recent low of 5.76% with the increase in US yields. This might be a hampering influence on the stock market.
How do these bonds work?
For example, a 10 year bond in India means that the Government has established a bond for 10 years. One will get a fixed rate of return for 10 years if he or she invests in such bonds. Two months ago, the return had increased from 5.76% to 6.20%. According to Stock Advisory Company, Currently, it is 5.977%.
Diving into basics: What is a bond?
As Investopedia suggests, a bond is a fixed income instrument that represents a loan made by an investor to a borrower. They are usually bought by banks. Bonds can be of two types:
- Corporate Bonds: Bonds are set forward by companies.
- Government Bonds: Bonds are set forward by the RBI on behalf of the Government. As announced in the budget, the Government is planning to borrow 12 lakh crores as revenue is less and expenditure is high.
More than Rs. 70.55 lakh crores worth bonds (or Government Securities) are issued by the government already. The government still plans to borrow more from the market through these G-secs.
Ideally, the government would want to pay at a lower interest and it tries to keep it at less than 6%. But two months ago, the interest had increased to 6.20%.
Why do Bond Yields rise?
Bond yield is the return received on investing in a bond or in a Government Security. The factor responsible for the rise is mainly the Monetary Policy set forward by the Reserve Bank of India. Due to the repo rate, the interest rates keep fluctuating. The change also depends on the state of the government, its borrowings, the global market, inflation, and the economy.
In brief, a decrease in interest rates increases the bond prices which eventually is responsible for lower bond yields. Similarly, rising interest rates are responsible for bond prices to fall and there’s an increase in bond yields.
A higher interest rate on bonds is less vulnerable to investors.
In consideration of the COVID-19 pandemic, Central Banks in various countries had lowered interest rates and set afloat programs to prevent bankruptcies. But due to the recent COVID vaccination drives leading to a massive recovery in healthcare, the Central Banks are looking forward to a spike in inflation. Very high inflation can turn out to be a nightmare for the economy, so the RBI increases the repo rate to grab control of inflation.
Increasing Bond Yields are an alarming concern for the stock market as investors tend to start investing in bonds or Government Securities instead of the stock market.
How is RBI working to control rising Bond Yields?
RBI has been buying bonds through Open Market Operations to keep the return below 6% which, in a way, is increasing the demands of bonds. Surging demand in bonds increases the price of bonds which will lead to a decrease in bond yields. If you want to know more, you should get Stock Market Courses.