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.

President Donald Trump said he plans to announce his choice for chairman of the Federal Reserve on Friday (January 30, 2026) morning, a long-awaited decision that could set up a showdown on whether the U.S. central bank preserves its independence from the White House and electoral politics.

For the past year, the President has aggressively attacked Fed Chair Jerome Powell, whose term as the head of the US central bank ends in May.

Mr. Trump maintains that Mr. Powell should cut the Fed’s benchmark interest rates more drastically to fuel faster economic growth, while the Fed chair has taken a far more judicious approach in the wake of Mr. Trump’s tariffs because inflation is already elevated.

“I’ll be announcing the Fed chair tomorrow morning,” Mr. Trump told reporters on Thursday (January 29) night as he went into the screening of the documentary “Melania” about his wife. “It’s going to be, somebody that is very respected, somebody that’s known to everybody in the financial world. And I think it’s going to be a very good choice. I hope so.”

Mr. Trump stayed relatively cryptic about his pick. His search was led by Treasury Secretary Scott Bessent with four known finalists: Kevin Warsh, a former Fed governor; Christopher Waller, a current Fed governor; Rick Rieder, an executive with the financial firm BlackRock, and Kevin Hassett, director of the White House National Economic Council. Mr. Trump, in the past, suggested that <Mr. Hassett was the front-runner, only to recently say that he wanted him to remain in his current post.

Mr. Trump did say on Thursday (January 29) night that “a lot of people think that this is somebody that could have been there a few years ago,” fuelling speculation that he had chosen Warsh, who was a finalist in the 2017 search for Fed chair that led to Powell’s selection.

Tensions between Mr. Trump and the central bank had been steadily mounting as the President used the renovation costs of the Fed’s headquarters to further lambaste Mr. Powell, a campaign that resulted in the Fed getting subpoenas from the Justice Department earlier this month.

The Fed chair took the rare step of issuing a video statement in which he said: “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president.”

Mr. Trump has long teased his Fed choice while saying his nominee would slash interest rates that influence the supply of money in the U.S. economy, the rate of inflation and the stability of the job market.

On the cusp of Mr. Trump’s announcement, Mr. Powell might have the ability to block him in an effort to ensure the Fed preserves its credibility by staying away from political considerations.

While his term as chair ends in roughly three months, Mr. Powell’s term on the Fed’s board of governors runs through 2028 and he could choose to remain in that post, likely blocking Trump’s ability to have his nominees control the majority of the seats on the board.

Of the seven Fed governors, former President Joe Biden picked three of them in addition to renominating Mr. Powell to a second term as chair.

If Mr. Powell stays on the board, he could also create a small procedural hurdle for Mr. Trump’s ability to nominate someone new to the board.

This would mean Mr. Trump would either have to choose an existing board member as chair or replace Stephen Miran, who is on leave from his job as chair of the White House Council of Economic Advisers to fill a term as governor that technically ends on Saturday. If Mr/. Trump chooses to replace Mr. Miran, he could name someone new to the board.

At a Wednesday news conference, Mr. Powell declined to say whether he would leave the board. But he did offer some advice to any successor about balancing the need for independent judgment with public accountability.

“Don’t get pulled into elected politics — don’t do it,” Mr. Powell said. “Another is, that our window into democratic accountability is Congress. And it’s not a passive burden for us to go to Congress and talk to people. It’s an affirmative regular obligation.”