Mint Primer: What the spike in US bond yields means for you

livemint.com:

Mint explains. 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. 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It has withdrawn more than a trillion dollars by now.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. 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.