Home   »   Current Affairs 2024   »   Bonds and Bond Yield

Relationship Between Bonds and Bond Yield

Context: Recently, the yield on the 10-year government bond rose sharply by 9 basis points, marking the largest increase in eight months.

More In News

  • Concurrently, the Indian Rupee depreciated by 38 paise, closing at 83.53 against the dollar, representing a 0.47 per cent decrease.
  • This decline was the most significant single-day percentage drop since February of the previous year.
  • The 10-year bond yield closed at 7.0382 per cent, up from the previous closing rate of 6.9438 per cent.
  • During the day, the yields briefly peaked at 7.09 per cent, which was a 12 basis point increase.

What are Bonds and Bond Yields?

  • Bond: A bond serves as a method for raising capital and can be issued by either a corporation or a government entity.
    • Investors may acquire bonds at a value greater than the nominal amount, known as a premium, or below it, which is referred to as a discount.
  • Bond Yield: The yield on a bond reflects the earnings that an investor receives from the investment.
    • When investors purchase bonds, they are essentially extending a loan to the issuer, who in return agrees to provide periodic interest payments and return the principal amount of the bond at maturity.
    • The yield encompasses the income generated both from the interest collected and any gains from selling the bond.
    • Notably, bond prices and their yields move in opposite directions.

Relationship Between Bonds and Bond Yield

  • There is an inverse connection between bond values and their yields; as the price of bonds increases, the yield decreases.
  • Since bonds typically pay a fixed rate of interest, investors tend to offload bonds in anticipation of rising interest rates and conversely, they may acquire bonds when they predict a decrease in interest rates, causing bond prices to escalate.

Effect on Bond Investors

  • An uptick in bond yields suggests a market expectation of higher interest rates, prompting investors to divest from current bonds to mitigate potential losses in principal value.
  • The net asset values (NAVs) of debt funds, which include government securities, tend to drop in response to bond price depreciation triggered by escalating yields.
  • The pricing of corporate bonds, which are typically more expensive than government bonds, also experiences a downturn due to the overall fall in bond prices.
  • Debt market participants experience losses as surging yields contribute to the depreciation of bond values and the NAVs of debt-oriented funds.
  • Equity investors may feel the pinch of rising bond yields since they can lead to increased borrowing costs for businesses, which might in turn impact their profitability.
Understanding Yield Curve Inversion
  • The yield curve is a graph that plots the yields of bonds with similar credit quality across different maturities.
  • When short-term bonds yield more than their long-term counterparts, the yield curve is said to be inverted.
  • Such an inversion in the yield curve is unusual and may indicate a looming economic downturn, affecting both consumers and investors.

Sharing is caring!

About the Author

I, Sakshi Gupta, am a content writer to empower students aiming for UPSC, PSC, and other competitive exams. My objective is to provide clear, concise, and informative content that caters to your exam preparation needs. I strive to make my content not only informative but also engaging, keeping you motivated throughout your journey!

Leave a comment

Your email address will not be published. Required fields are marked *