EXPLANATION: Why US Yields Are Rising and How It Makes Government Borrowing Expensive
With growing optimism about the recovery from the pandemic and the acceleration of the vaccination campaign with several vaccines now on offer, the economic outlook is improving rapidly. With that comes risks – rising inflation and the anticipation of a change in US Fed policy. As a result, yields have skyrocketed as bond investors seek compensation for inflation risk.
The new US stimulus package is further boosting yields by paving the way for faster reopening and stronger economic growth. “The personal savings rate in the United States has now stabilized at around 20% compared to the pre-covid cycle average of around 7%. High savings will also help the economy recover more quickly once the pandemic is under control and consumers start using the savings to spend on goods and services, ”said Rusmik Oza, executive vice president, responsible for basic research at Kotak Securities.
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10-year US Treasury yields fell from 0.9% at the start of the year to 1.7% last week. During the containment phase of the pandemic, yields had fallen to 0.3%.
Public loans are getting expensive
Yields climbed to a point where the Indian government had to borrow money from the market to meet its borrowing targets for the year. A recent report by CARE Assessments pointed out that weighted average returns hit a 5-week high of 6.14% from 5.65% the week before. This is when the government has yet to raise around Rs 84,000 crore in the market to meet its target of Rs 12.8 lakh crore.
Rising yields forced the central bank to step up operations and facilitate government borrowing. “Liquidity determines many macroeconomic parameters, including government bond yields,” Kunal Sanghavi, chief financial officer of HDFC Securities, told Financial Express Online. “Numerous stimulus and easing measures in India and around the world have put inflationary pressure on the system, resulting in higher yields, especially in government bonds where creditworthiness is higher as well as regular bonds. and active. RBI intervention in terms of open market operations and twist operations to ensure stability and achieve their objective of large borrowing from bonds, ”he added.
Throughout 2020, low interest rates all over the world helped push stocks higher. Even if now, the situation could be reversed if bond yields continue to climb.