Facts for Prelims (FFP)
Source: ET
Context: Sovereign bond yields fell to near one-year lows following RBI’s record dividend payout to the government. The 10-year benchmark yield closed at 6.978%, its lowest since June 6, 2023.
Expectations of lower government borrowing and improved fiscal deficit contributed to the decline. Additionally, easing crude oil prices and resumption of overseas investment boosted market sentiment.
What is Bond Yield?
Bond yield represents the return on capital invested in a particular bond. It is inversely related to bond price, meaning as the price of a bond increases, its yield decreases, and vice versa. This relationship is crucial in the bond market, as fluctuations in yield impact the attractiveness of bonds to investors.
A decline in government bond yields has significant implications, as it lowers borrowing costs across the economy, with sovereign debt yields serving as benchmarks for determining corporate borrowing rates. The recent decrease in sovereign bond yields can be attributed to the record-high dividend payout of Rs 2.11 lakh crore by the Reserve Bank of India to the government, which is expected to bolster the government’s financial position.
Additionally, improved market sentiment due to falling crude oil prices has spurred buying interest in bonds, further contributing to the decline in yields.
Sovereign bonds are specific debt instruments issued by governments and play a crucial role in financing government expenditures.
Factors Affecting Sovereign Bond Yield:
- Creditworthiness: Perceived ability of the issuing country to repay debts.
- Country Risk: External/internal factors affecting stability.
- Exchange Rates: Impact of economic volatility and inflation on bond interest rates.
