Bond Yield: Meaning, Types, Calculation and Importance

Context: India’s 10-year benchmark government bond yield has risen by about 26 basis points in the past month. This happened despite the RBI cutting the repo rate by 100 basis points (1%) over the past seven months.

What is Bond Yield?

• A bond yield is the return an investor gets on a government or corporate bond.
• Formula:
  • Bond Yield = (Coupon Payment / Current Price of Bond) ×100
• When bond prices, yields (since the denominator increases).
• When bond prices, yields (since investors demand a higher return for perceived risks).

Relation between Bond Yield and Rate Cuts

• Normally, when the RBI cuts the repo rate:
  • Borrowing becomes cheaper.
  • Demand for bonds rises (since they give relatively higher fixed returns).
  • This pushes bond prices up and yields down.
• So, rate cuts usually lead to falling bond yields.

Why Increased Bond Yield Despite Rate Cuts?

RBI’s Hawkish Stance

“Hawkish” means RBI is more concerned about controlling inflation than supporting growth.

• RBI has signalled that it may not cut rates further because risks like global trade tensions, oil price shocks, and domestic fiscal issues remain.
• This made investors worried that liquidity support would be limited in the future, so they started selling bonds.
• Selling bonds lowers bond prices → yields rise

Higher Government Borrowing Concerns

The Government plans to reform GST and spend more.

• This raises the fear of fiscal deficit slipping (i.e., government spending more than its income).
• To cover this, the government will need to borrow more by issuing bonds.
• More supply of bonds in the market = lower bond prices.
• Lower bond prices → higher yields.

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