Bond Yields Are On An Upward Trajectory: Here's Why?

In mid November this year, yield on government bonds with 10-year maturity moved a tad higher over 7% mark to 7.06%, a level not seen since September 8, 2016. Scaling inflation which in the month of November moved past the RBI's comfortable level of 4% and rising crude oil price in the international markets were cited as some of the main triggers for this rise in yields which means a lot for the economy.

On a more recent basis, yields spiked to 17-month high of 7.26% on December 21, 2017 which during the pre-demonetisation period stood comfortably at around 6.9%.

Key economists suggest that since the demonetisation there was lot of overbuying in the bond market which is now seeing a correction. And bond yields can further inch up and climb the 7.5% mark. On the other hand, as reported by Bloomberg, bond prices are making the fastest decline not seen in two decades time.

So, here are listed few of the major reasons that are pushing bond yields higher:

1. RBI's MPC minutes with concerns over inflation and growth uncertainty: The minutes of the RBI's monetary policy committee meet revolved around inflation and growth fears. And as RBI representatives warned against accommodative stance on inflation it may well be the case that the central bank increases key policy rates rather sooner. This expectation is already factored in by the bond market with rise in yield to levels of 7.26% on Thursday.

2. Inflation and Rising crude oil price: Inflation concerns with broader inflation being more than core inflation reported for the first time in 14 months is likely to see some tough measure by the government in near term. And to curb rising inflation, RBI generally pushes interest rates in the economy higher which scales down the price of bonds. Bond prices and yield share an inverse relationship and hence in such a scenario, bond yields climb.

The rising bond yield is also a function of higher crude oil prices in the international market which saw reaching to levels as high as 65$ per barrel. This is because the government took 45$ per barrel as its price while making fiscal calculations for the current FY.

3. Chances of Fiscal slippages: In the Union budget for the year, fiscal deficit target was set at 3.2% of GDP. And as for the first 7 months to October this FY, this measure has already reached 96.1% of the target, economists anticipate a higher deficit than the budgeted target.

Further doubts on fiscal slippages had come to the fore after Finance Minister on Monday moved the second batch of supplementary demand or grants in the Lok Sabha for the FY18.

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