Record rise in US bonds, yield at 16 year high

USA is the largest economy in the world and hence the impact of American economic activities is felt all over the world. The latest calls are related to the bond market, on which the eyes of investors around the world are fixed. Currently, bond yields in America have become the highest in many years. This is going to have an impact on markets and economies around the world. Let us know what is bond yield? How to calculate it? What could be the impact of increasing US bond yields?

Rise of US bond yield

Earlier this week, American bonds made a new record. On Monday, October 23, the yield on America’s 10-year government bond crossed 5 percent. The 10-year American bond is used as a benchmark. On Monday, the yield of this bond reached 5.02 percent, which is the highest level since July 2007. This means that US bond yields touched their highest level in more than 16 years. Later there was some softening and on Monday the US bond yield finally settled at 4.85 percent.

What is the bond yield?

It is important to understand what actually is bond yield? Bond is a debt instrument of investment. Any government issues bonds to meet its various needs. Investors, in a way, give a loan to the government by buying bonds. Since there is a loan, there will also be interest on it. Interest is also available on bonds. The rate at which interest is paid on any bond, i.e. the rate at which investors who give loans by investing in the bond get returns, is called the yield of the concerned bond. Simply put, you give a loan to the government by buying a bond and the income you get from that loan is the bond yield.

How to calculate bond yield?

There is a fixed formula to calculate bond yield. It is calculated by dividing the coupon amount by the price. When an investor buys a bond, the bond issuer pays him a fixed amount as interest. Apart from this, when the bond matures, the investor also gets payment. At the time of maturity, the issuer pays the investor equal to the face value of the bond. Seen this way, the principal amount remains the same throughout the period. Since bonds are traded in the open market, their yields keep changing. It can also be understood that just as you buy shares of a company and it is traded, the same happens with bonds also.

What is the effect of increasing bond yields?

Talking about the effect of increase in bond yield, as mentioned above, when the yield of American bonds increases, the yield of Indian bonds also increases. Meaning, the first impact could be that the yield of 10-year bonds of the Government of India may increase further. Investors benefit from increasing bond yields as they get higher returns than before. In such a situation, investors start withdrawing money from other options and investing it in bonds. Due to this, outflow is seen in the stock markets. That means investors start withdrawing money from the stock markets, due to which the stock markets fall. On the other hand, pressure on the government increases. As the yield increases, borrowing becomes expensive for the government. This means that now the government has to spend more to raise money from bonds. This in turn increases the deficit of the governments and ultimately they are forced to cut expenditure on everything from infrastructure to people’s welfare schemes.