MUMBAI: A sharp rise in Japanese government bond yields is driving a significant shift in global capital flows. As yields reach multi-decade highs, concerns around Japan’s large public debt—about 250 per cent of GDP—are intensifying.
This move has triggered a rapid unwinding of the yen carry trade, where investors borrowed cheaply in yen to invest in higher-yielding assets abroad.
As the carry trade reverses, capital is being pulled from global markets, tightening liquidity and adding pressure to asset prices in developed economies, especially the US.
US yields ease amid rate cut hopes
In the US, the bond market has moved past the “higher-for-longer” phase. Yields on long-term Treasuries have declined in recent months, with markets now expecting the Federal Reserve to begin cutting rates. At the same time, global trade tensions and new tariffs have added to market uncertainty, but inflation remains in check, giving the Fed room to act.
Despite global headwinds, Indian government bond yields have risen recently, driven by domestic factors such as GST rate changes and increased state-level borrowing. The rupee has also weakened, recently breaching the 88-mark against the dollar.
However, foreign investors continue to show interest in Indian debt. This is supported by stable macroeconomic indicators, a recent sovereign rating upgrade, and India’s upcoming inclusion in global bond indices. Headline inflation remains below 2 per cent, and the central bank has lowered its inflation forecast, creating room for yields to ease in the near term.
With the Indian yield curve currently steep, long-duration bonds are offering attractive value. Given strong fundamentals, low inflation, and expectations of rate cuts both globally and domestically, investors may benefit from adding duration to their fixed income portfolios.
The next central bank meetings in Japan and the US will be critical in setting the tone for bond markets globally. As capital reallocates in response to changing rate environments, countries with solid economic foundations—like India—stand to gain from steady inflows, even amid global uncertainty.
