For years, bonds took a backseat to stocks. But rising yields are changing the equation. The US 10-year Treasury yield crossed 5.35% on October 7, its highest since 2002. India’s 10-year government bond yield has also climbed to around 7.2%.
Here’s what investors need to know.
Why are yields rising?
Four forces are driving the surge:
• Oil prices: The Iran conflict is keeping crude above $100, fuelling inflation concerns.
• Fed rate hikes: The US Federal Reserve has resumed raising interest rates.
• Heavy borrowing: The US government and big tech companies need more money, pushing bond supply higher.
• Fewer buyers: Without support from the Fed, long-term bonds need to offer higher yields to attract investors.
First, ask yourself why you want bonds
Are you looking to earn regular income or profit when bond prices rise?
• Yield farmers prioritise income and relatively stable returns.
• Bond traders buy when prices fall, hoping to profit if yields decline.
Remember, bond prices and yields move in opposite directions. A 1 percentage point rise in yields can push a bond fund with a duration of 5 years down by roughly 5%.
Types of Bonds
• Short-term bond funds: Less sensitive to interest rate changes, making them worth considering for investors prioritising stability.
• Longer-duration funds: Offer greater potential gains if yields fall, but can suffer bigger losses if yields continue rising.
• High-yield and emerging market funds: Have delivered higher historical returns in some cases, but carry greater credit risk.
What it means for Indian investors
US bond returns depend on both interest income and currency movements. With US yields around 5.2% and Indian government bond yields around 7.2%, a weakening rupee can significantly affect the final return.
Indian investors should also consider LRS limits, applicable TCS rules and the tax treatment of bond fund investments.
The bottom line
High yields create an opportunity, but they don’t guarantee profits. Many investors may prefer high-quality, short-to-intermediate-duration funds and staggered investments. Longer-duration funds are better suited to those who believe yields have peaked and can handle price swings.
To read more, click: How to Invest When Bond Yields Are High: Strategies & Risks
Note: This summary is based on the provided article.