As global bond yields spike; why is it hitting Indian equities?

30 May 2025 , 11:35 AM

ARE GLOBAL BOND YIELDS RISING GLOBALLY?

The concerns are not so much visible in the 10 year bond yields, which is the general benchmark for bond markets. We are seeing problems in the longer-term 30-year bond yields. Over the last 5 years, the bond yields in two of the largest economies in the world; the US and Japan have risen sharply; as is evident in the chart below.

Chart Source: Trading Economics

In the last 5 years, the 30-year bond yield in the US has gone up from around 1.4% to 5.0%; while the 30-year bond yield in Japan has gone up from 0.5% to 3.0%. In the same period, the Indian 30-year bond yields have spiked till 2022; but since then, the yields are trending down. That could also be due to the fact that Indian 30-year bonds are not as widely traded as it is in the US and Japan. What exactly has driven this bond yield spike in the US and Japan in recent weeks?

WHAT IS DRIVING BOND YIELD SPIKE IN JAPAN AND THE US?

There are several reasons for the spike in the bond yields in both these nations. Here is a quick dekko.

• In the case of the US and Japan, a good deal of bond selling was seen in longer durations and investors shifting to shorter durations. This selling led to a fall in bond prices and a consequent spike in yields. This shift from long duration to short duration bonds can be attributed to heightened uncertainty about the future.
• Inflation expectations have gone up visibly in recent weeks. In 2013, Japan had set a high inflation target of 2%, although that did not help in pushing up inflation or growth. In the case of the US, it has more to do with the reciprocal tariffs and the anti-immigration policy that is likely to push up inflation.
• The third reason is rising debt in Japan and the US. Among all the developed countries, Japan has the highest debt/GDP ratio of 210%. That is starting to push up yields. In the case of the US, the recent “Big Beautiful Bill” which passed with 1-vote, has envisaged additional cost of $3.8 trillion, with debt to GDP rising from 99% to 128%.

In short, the higher bond yields are driven by higher inflation expectations, shift to shorter duration bonds, and concerns over burgeoning debt levels.

HAVE INDIAN STOCKS BEEN IMPACTED BY GLOBAL BOND YIELDS?

For starters, such a spike in bond yields makes Indian stocks more volatile. That has been the experience in the month of May 2025. Check the table below.

Date	Open	High	Low	Close	Daily Returns	H/L Ratio
26-May-25	24,919.35	25,079.20	24,900.50	25,001.15	0.60%	0.72%
23-May-25	24,639.50	24,909.05	24,614.05	24,853.15	0.99%	1.20%
22-May-25	24,733.95	24,737.50	24,462.40	24,609.70	-0.82%	1.12%
21-May-25	24,744.25	24,946.20	24,685.35	24,813.45	0.52%	1.06%
20-May-25	24,996.20	25,010.35	24,669.70	24,683.90	-1.05%	1.38%
19-May-25	25,005.35	25,062.95	24,916.65	24,945.45	-0.30%	0.59%
16-May-25	25,064.65	25,070.00	24,953.05	25,019.80	-0.17%	0.47%
15-May-25	24,694.45	25,116.25	24,494.45	25,062.10	1.60%	2.54%
14-May-25	24,613.80	24,767.55	24,535.55	24,666.90	0.36%	0.95%
13-May-25	24,864.05	24,973.80	24,547.50	24,578.35	-1.39%	1.74%
12-May-25	24,420.10	24,944.80	24,378.85	24,924.70		2.32%

Data Source: NSE

If you look at the last 10 trading session on the NSE, the daily returns have been negative on 5 days and positive on 5 days, with average returns of 0.03%. Similarly, if you look at the High / Low spread ratio over the last 11 days; it has been more than 1% on 7 out of the 11 days, of which on 2 days it has been above 2.0%. The average H/L variation stands at 1.28%, which is relatively high. The spike in bond yields globally may not have led to a market fall, but it has surely spiked volatility in the Indian markets.

WHY DO GLOBAL YIELDS IMPACT INDIAN MARKETS?

In the case of Japan and the US, the issue is not just with the borrowing, but also the fiscal deficit that the two economies run, in the range of 6.5% to 7.0% of GDP. Coming back to the India story, here is why Indian stocks are getting impacted.

• In the case of the US, rising bond yields result in chunk of FPI money gravitating towards the US bonds, in search of attractive risk-free returns. This normally triggers risk-off buying and emerging market equities (like India) end up bearing the burden.
• The issue is slightly more complicated in the case of Japan. For long, Japan has been the source for carry trade funding. Traders are able to borrow cheap in Japan and deploy in markets like India. Now, that carry trade would have to be unwound.
• Thirdly, in times of monetary policy convergence, Indian bonds yields eventually sync with global yields. That means a spike in Indian bond yields too. That not only makes debt more attractive than equity by enhancing their current yields; but also depresses equity valuation as future cash flows get discounted at a higher rate.

That is why; Indian markets have seen a spike in volatility amidst rising bond yield in the US and Japan. That is also evident in the VIX spiking to 18.7 levels in this week.