As the rupee continues it free-fall, hitting a new high of 71.79 against the dollar on Wednesday, the 10-year bond yield has surpassed the 8 percent level. India's benchmark bond yield is at 8.09 percent, rising for eight consecutive days. The rate is its highest since December 2014.
Why is the 10-year bond yield rising?
A widening current account deficit (CAD) from an increase in crude oil prices and fall in the Indian rupee has exerted an upward pressure on bond yields. India's foreign exchange reserves have fallen by $26 billion since April 2018. According to data from National Securities Depository, foreign portfolio investors have sold a net of Rs 38,312 crore worth of domestic bonds and equities this year.
How should you rethink your investments?
Your investment strategy will depend on your investment duration, the need for it and the asset class you choose.
Theoretically, elevation in bond yields increases borrowing costs, which then hurts profit margins of companies with high debt levels. This could hurt equity investors as bonds become more attractive due to the opportunity for high returns. It, therefore, makes sense to move to company stocks with low or zero debt and those with high export incomes.
Note that bond yields could go higher as the US Federal Reserve is expected to announce another rate hike and so is India's RBI.
However, as the macroeconomic factors of the country weaken, bond yields grow and result in their reduced prices. Bond yields and their prices are inversely related and this will expose long-term debt funds to duration risks. This means that if you are planning for short-term returns, avoid long duration debt funds or government securities at the present. You could pick ultra short and low duration corporate bond funds instead. For long-term, the over 8 percent returns on bond yields are attractive.