How the global bond sell-off could affect India | Explained

The story so far: Economies across the world are facing a new problem: investors selling their government bond holdings. This could have serious implications for the future borrowing plans of governments, including India’s. It also potentially has knock-on effects on the cost of borrowing for the private sector and the levels of private sector investment in the economy.

What is the relationship between bond prices and yields?

A bond is nothing more than a contract of sorts between a borrower (the issuer of the bond) and the lender (the purchaser of the bond). It is basically an agreement that the purchaser will lend money to the bond issuer with the promise that it will be repaid with interest over a set period of time.

Bonds can be bought and sold in the bond market, and their price follows the demand and supply rules of any other commodity or asset. If there is more supply than demand, the price will fall, and when demand outstrips supply, the price will rise.

Now, when there is a selloff of bonds, such as what is happening globally currently, there is more supply in the market than there is demand. As a result, the bond prices fall.

When bond prices fall, the yield — basically the return the bondholder gets, measured as a percentage of the bond price — rises. The reason for this is simple. If you can buy a bond today at a lower price than it was a week ago, but the payout you get is the same as when the bond was expensive, then your effective return (yield) is naturally higher.

What is happening to yields now?

The 10-year U.S. Treasury yield, which is the global benchmark for borrowing costs, has been hovering at about 4.81%, the highest it has been since late 2023.

Japan’s 10-year government bond yield touched 3%, reportedly for the first time since 1996. German and U.K. 10-year yields rose to multi-year highs. The ⁠yield on ‌the Indian benchmark 10-year bond rose from 6.94% to 6.97% over the last few days, with the latest level being 6.96%.

High yields mean that new bonds issued by governments will have to offer higher interest rates to attract investors, which basically results in higher borrowing costs for these governments.

Since government sovereign bonds typically act as the baseline for investors, a rise in their yields means the rates promised by companies issuing bonds will also have to rise. This means corporate borrowing from the market also becomes more expensive. This can have knock-on effects on the levels of private investment.

Why are investors selling their bonds?

The first reason has to do with the extremely high levels of borrowing by the U.S. government. The U.S. federal national debt stands at over $40 trillion as of August 2026, which is about 126% of its GDP. In comparison, India’s general government debt, which includes the Centre and the States, is about 80-84% of GDP.

With such high levels of debt, the U.S. government will have to issue more bonds to pay for its expenses, including the interest on its existing debt. In such cases, however, investors refuse to buy bonds at low interest rates because they want higher compensation for the higher risk of holding U.S. government liabilities.

Investors then sell their current, lower-payout bonds in the expectation that future bonds will come with higher payouts. This is what is happening now.

The other major factor affecting the attractiveness of bonds is the rate of inflation. With the conflict in West Asia periodically flaring up and driving oil prices higher, inflation has been at elevated levels across most of the world. Now, if higher inflation persists, then central banks often raise interest rates to rein in inflation.

So, during periods of high inflation, bondholders tend to sell their bonds in the hopes that interest rates will rise and they will be able to purchase bonds in the future that promise higher interest. Also, since inflation eats into current purchasing power, bond holders demand higher returns to compensate for this inflation effect.