But the question is why the government bond yield is relevant for modern financial market home loans and businesses?

In order to finance public expenditure, the government borrows regularly and invests in infrastructure and social obligations. For this reason, the government issues bonds to raise funds and bonds are considered debt instruments. Through the bond, investors lend money to the government and receive interest payments for the time being. At the same time, the government is responsible for paying the entire amount after maturity.

Hence, bond yield indicates the return an investor earns based on the bond's market price and cash flows. For instance, it is assumed that the face value of a Bond is $100 and the government is paying annual interest of $4. In this case, the interest rate is considered the coupon rate. 

There are various factors responsible for rising bond yields globally.  

The first reason is continuous inflation growth, and for this reason, global investors expect it to rise significantly in the coming years. For this reason, investors try to get a better return from bonds to compensate for inflation, as it can impact purchasing power. 

The second reason is rising energy prices due to the trade war and Middle East tensions in the global economy. Due to higher energy costs, transportation, manufacturing and logistics costs. For this reason, investors are shifting towards safe asset classes. 

The third reason is higher government borrowing, as governments are trying to compensate for the budget deficit with the issuance of bonds. It gives government institutions the opportunity to overcome short-term financial challenges. 

The fourth reason is high demand for investment capital, as private and public organisations are in need of capital. Companies are heavily investing in infrastructure, technology, and data centres. 

Banks often focus on different financial factors to set home loan and personal loan interest rates. In this case, financial institutions focus on borrower defaults, operating expenses, competition and expected profitability to set specific interest rates. In this situation, rising government bond yields are one of the influential factors that directly impact home loan interest rates.

The cost of funds increases, and it directly impacts the interest rate of personal loans. Banking institutions focus on loan tenure and the level of competition, based on which they tighten lending standards. For this reason, borrowers who have low credit profiles may face additional pressure to get loans at reasonable interest rates.

High U.S. government bond yields indicate that investors are seeking higher returns in dollar-denominated assets. It can influence foreign capital flows and the yields demanded on Indian government bonds. However, higher U.S. government bond yields do not guarantee that foreign investors will withdraw money from the Indian market.

*It is written only for educational purposes, and there is no intention to influence any asset class.