The Impact of US Treasury on the Indian Bond MarketWHAT IS THE YIELDONA BOND? The yield on a treasury bond at any point of the time is the per-year return investors can expect to earn if they buy the bond at that point and hold on to it until maturity. Treasury bonds are financial securities issued by the US government to finance its fiscal deficit—the difference between what it earns and what it spends. In the aftermath of the covid-19 pandemic, the US Federal Reserve, had printed and pumped a lot of money into the financial system to drive down bond yields and interest rates. This was done to encourage people to borrow and consume more, and companies to borrow and expand.WHY HAVE THE YIELDS BEEN RISING? For more than a year now, the US Fed has been gradually withdrawing the money it had printed and pumped into the financial system. It has withdrawn more than a trillion dollars by now. With less money going around, bond yields have been going up. Further, the money printing had led to a multi-decade high inflation, forcing the Federal Reserve to raise interest rates. The Fed feels that it’s not done raising rates yet. This is another reason which has pushed up yields. The yield on a 10-year treasury bond had stood at 2.32% as of end March 2022. It has gradually been rising since then.THE BAROMETER The returns on the US treasury bonds tend to act as a benchmark for interest rates everywhere. 10 year- US treasury yield (in %) 4.95 O27 Jan 2007 25 Oct 2023 Source: Board of Governors of the Federal Reserve System (US)HOW DOES THIS IMPACT YOU AND ME? US treasury bonds are deemed to be the safest investment in the world. So, returns on these bonds tend to act as a benchmark for interest rates everywhere. If yields rise in the US, interest rates rise globally. This is one reason rates in India will continue to remain high and the Reserve Bank of India won't cut rates even if inflation continues to come down. That means high EMIs.WILL THIS HAVE ANY OTHER IMPACT? The US bond yield has jumped dramatically, by 86 basis points, from 4.09% on 31 August to 4.95% now. One basis point is one hundredth of a percentage point. The higher interest rates in the US have incentivized foreign institutional investors (Flls) to move money to the US. In September and October Flls were net sellers of stocks worth %28,728 crore, or a little under $3.5 billion. Money coming in from retail investors has ensured that the BSE Sensex has fallen by just 2.6% from August-end to now.HOW DO THINGS LOOK GOING FORWARD? The Fed’s next monetary policy meeting is on 31 October and 1 November. It’s widely expected that the Fed won't raise rates this time around, but will do so in December. In the days to come, any further escalation of the conflict in West Asia will lead to bond yields falling. Two famous fund managers, Bill Ackerman and Bill Gross, have said the US economy is less healthy than recent data suggests. If incoming data backs up what these fund managers say, then bond yields will fall from their current levels.KEY TAKEAWAYS BICeK IgA ol Coe RUM Lo) Starla tn MURS CONY ATA oe NRCo) borrow money for varying periods of rs SEU A lee MASAI Cre to Treasury prices, and yields are often used to price and trade fixed- income securities including Treasuries Mice ae cleU aie CMI Re Cea earl Uele Mar NVMe lie eye longer-term Treasury securities OISOr) MarR al tat Ten ole Rear Ta Solace ROCs SCAU ala oe assessments of the economy's prospects; higher yields on long-term instruments indicate a more optimistic outlook and higher inflation expectations. rer