Rising Bond Yields & Debt Fund Investors

Bond yields closely track the movement in monetary policy rates, inflation, central and state government borrowing programs and interbank liquidity, amongst others, and we are already witnessing an accommodative monetary policy and large fiscal deficit, which is fuelling inflation expectation and rise in bond yields

The equity market, in the last couple of months, has become quite volatile. It is trading in a wide range. For example frontline equity index Nifty has gone down by 1,000 points and recovered more than twice in a span of less than three months. One of the chief reasons for such volatility is the spike in bond yields globally. The yield on the benchmark US Treasury note rose to more than 1.7 per cent recently, highest in the last 14 months. Even the Indian benchmark bond yield has moved up from below 5.9 per cent at the start of the year to little more than 6.2 per cent over the next two and half months.

Bond yields closely track the movement in monetary policy rates (interest rates at which the RBI borrows from and lends money to banks), inflation, central and state government borrowing programs and interbank liquidity, amongst others. We are already witnessing an accommodative monetary policy and large fiscal deficit, which is fuelling inflation expectation and rise in bond yields. The equity market has an indirect bearing on the rise in the bond market; however, the debt market is directly impacted by any rise in the bond market. This is clearly reflected in the performance of debt funds. The graph below shows the performance of the debt category funds in the last three months.