Impact of Bond Markets on US and Global Economies

The bond market has played a significant role in influencing global economic policies, as evidenced by the reaction to Trump's tariffs. Yield on the 10-year US treasury bond surged to almost 4.5% from below 4%, the largest spike in nearly 25 years, following the implementation of these tariffs.

Reasons Behind Bond Yield Increase

• Adverse shifts in US consumer sentiment.
• Unpredictable policy moves and tariffs by the Trump administration, causing fears and uncertainties.
• Sell-offs by hedge funds and investors, and possibly by China, to counteract losses in equity markets.

China's Role in the Bond Market

China, holding approximately $761 billion in US debt, might use treasury sales as a bargaining tool in trade disputes or to destabilize US economic growth by increasing interest rates.

Lessons for India

India should prioritize domestic investors over short-term foreign investors, as demonstrated by the US bond market scenario. When included in the Emerging Market Bond Index by JPMorgan Chase, India experienced an increase in foreign interest in its government securities (G-Secs), which while beneficial has inherent risks.

Risks of Increased Foreign Ownership in Indian Bonds

• Potential for increased exchange rate volatility due to portfolio adjustments.
• Risk of sudden cessation of inflows, potentially destabilizing the market.
• The bond market's influence can force policy changes, as seen in recent US experiences.

India's advantage lies in having its sovereign debt predominantly owned by domestic banks and financial institutions, protecting it from external economic manipulations. The Reserve Bank of India (RBI) is cautious about foreign ownership and limits foreign access to certain maturity G-Secs, aiming to keep foreign ownership within safe limits.