Indian 10-Year Bond Yield Breaches 7% on Geopolitical Tensions

According to a report by the Bank of Baroda, the 10-year yield is expected to fluctuate between 6.9 per cent and 7.1 per cent through the remainder of the month.

"We expect India's 10Y yield to trade in the range of 6.9-7.1% in the current month, with risks tilted to the upside. The cut-off yield for the New GS2036 at 6.94% also suggests that yield is likely to hover in that range and not expected to be much below the 6.9% mark," the report said.

Government bonds, often called G-Secs, are low-risk debt securities issued by governments to raise funds, promising to pay periodic interest (coupons) and return the principal upon maturity. Yield represents the actual return on investment, calculated as the coupon divided by the bond price and moves inversely to the bond's price.

The primary risk to the bond market emanates from the absence of a formal peace deal in ongoing global conflicts, which continues to keep yields sticky. Recent developments, including reports of the United States rejecting a peace plan from Iran, suggest a higher probability that yields will continue to hover around the 7 per cent threshold.

As per the report, markets are also awaiting India's upcoming inflation data to gauge the impact of higher global producer and retail prices. The report noted that any Consumer Price Index (CPI) print exceeding the 4 per cent mark poses a significant upside risk to domestic yields.

"In May'26 (up to 8th May 2026), we saw net FPI debt inflows at USD 460mn compared to net FPI equity outflow of USD 1.5bn. However, amidst a volatile dollar and elevated geopolitical risk, pressure on debt outflows may continue to build up and it would put pressure on India's 10Y yield," the report noted.

The BoB report also mentioned that domestic liquidity conditions remain comfortable at approximately 0.8 per cent of Net Demand and Time Liabilities (NDTL), though net durable liquidity shows some moderation. This pressure is attributed to a faster pace of accretion in currency in circulation. Despite these domestic factors, the directional movement of India's 10-year yield remains closely aligned with global trends.

A comparison of the yield curve, the report said, reveals that the 5-year to 40-year segment exhibits considerable stickiness as rising oil prices drive investor sentiment regarding inflation.

"Yield curve comparison reveals that 5Y-40Y part of the curve has exhibited considerable stickiness as inflationary concerns from a rising oil price dominate investor sentiments. The gap between 10Y and 3M paper rose to 171bps as on 8 May 2026, compared to 142bps as on 27 Feb 2026. The short-end part of the curve was supported by ample system liquidity, not exhibiting much momentum," the report highlighted.

Globally, yields rose sharply across major economies since late February. As per the report, in April, the United Kingdom recorded the sharpest rise in 10-year yields, followed by South Korea, Thailand, and the United States. Central banks globally continue to signal inflationary risks, with many pointing to stickier input prices in recent manufacturing surveys.

In the US, the 10-year yield rose by 43 basis points in April as price pressures persisted despite robust home sales and job data.

"BoJ have hinted at possibility of rate hike in the coming months, if there is no early end to the war and inflation continues to breach central bank target levels. The central bank also revised upward its inflation projection for fiscal 2026 to 2.8% from 1.9% in Jan'26," the report stated.

- ANI