Global Bond Markets Slip Into a Tailspin, but Could This Be India’s Moment to Shine?

The sharp rise in bond yields across major markets like the US and Japan has stoked fears of a sentimental shift towards risk-aversion among investors. While this underscores growing unease over America’s mounting debt and its ability to finance it sustainably, the turbulence might just offer a silver lining for India. With global capital seeking relatively stable and high-yielding havens, Indian equities and debt assets could find themselves in an unexpectedly favourable spotlight.

The US Problem

Global bond markets have slipped into a tailspin, with yields on the US 30-year Treasury surging past the 5% mark amid deficit concerns. “The spike in yields came as investors grappled with uncertainty following Moody's recent downgrade of the US sovereign credit rating, which coincided with a House committee's approval of Trump-backed tax cuts for a full floor vote,” said Devarsh Vakil, Head of Prime Research at HDFC Securities.

“The proposed tax legislation has become a key source of market uncertainty, with investors concerned that revenue reductions could further increase the government's debt burden and worsen the federal deficit. This backdrop of fiscal concerns has sustained pressure on government bonds and broader market sentiment,” Vakil explained.

Moreover, despite growing calls for rate cuts, the Federal Reserve has held its ground, keeping interest rates elevated, further inflating the cost of servicing the US’s swelling national debt. This stance has fuelled a sharp bond sell-off, driving yields even higher and amplifying jitters across global financial markets.

Bond market volatility also drove selling pressure across Wall Street, with benchmark stock indices witnessing their worst fall in a month.

The Japan Factor

Eastwards in Japan, a similar story was brewing in the background as yields on long-dated Japanese government bonds climbed to new highs following a weak auction outcome, sparking fears over weak demand.

Super-long yields on Japanese bonds have also been on an uptrend, tracking the upward movement of US Treasury yields.

Now, what has ensued is that Japan has been using quantitative easing since 2013, with the central bank buying large amounts of government bonds (JGBs), even as global inflation and yields rose after the pandemic. By 2024, the Bank of Japan owned nearly half of all JGBs, creating major pressure on its bond market as Japan’s low yields stood out against higher global rates.

To rein that in, Japan began slowly reducing its bond holdings in July 2024, a process expected to last until early 2026. However, with US yields rising and uncertainty around future Fed policy, demand for JGBs suddenly dropped last week, triggering a sharp sell-off. This has sparked fears of Japan facing its own version of the 2013 “taper tantrum.”

“What’s more, since Japan holds over $1 trillion in US Treasuries, there’s concern that Japanese investors may now sell US bonds to switch to higher-yielding Japanese ones, potentially pushing US yields even higher and causing ripple effects across global markets,” said Vishal Goenka, Co-Founder of IndiaBonds.com.

India—The Surprise Beneficiary

Under usual circumstances, a spike in US bond yields would warrant caution bells for Indian equities and debt, but the current global scenario is unprecedented. Since the root cause of the problem is the unsustainable US fiscal deficit and debt, VK Vijayakumar, Head of Research, Geojit Investments, believes some capital flows could divert away from US assets towards other economies where prospects for growth and earnings are better, primarily emerging markets.

With India being the bright spot among emerging market economies, several experts expect a significant portion of capital outflows from US assets to make their way into Indian debt and equities.

A recent Bank of America survey also heralded  emerging markets as “the next bull market," especially as the "sell US" narrative gathers pace. Similarly, JPMorgan also upgraded its outlook on emerging market equities from neutral to overweight, citing easing US-China trade tensions and appealing valuations.

Goenka also highlighted India’s relative insulation from global yield movements as of now due to its strong domestic and fiscal position. The current market pricing has extreme bullishness built in, with the 10-year G-Sec hovering around 6.25% and expectations of imminent rate cuts by RBI, Goenka stated.

He further shed light on the growing divergence between Indian and US bond markets at the current juncture. “While global markets often move in tandem, India and the US bond markets are currently charting different paths, reflecting distinct economic and policy backdrops. Indian bond yields have been trending lower in recent weeks, supported by stable inflation, expectations of policy continuity, and strong foreign inflows. In contrast, US bond yields have risen sharply, driven by persistent geopolitical risks and a hawkish outlook from the Federal Reserve,” Goenka said.

Taking the point forward, Goenka sees this divergence as a sign of India’s relative macroeconomic stability and its rising attractiveness as a fixed-income destination, even in a turbulent global environment. These encouraging indicators, coupled with growing global confidence in India’s long-term growth story, are expected to channel more inflows into Indian equities and debt markets.

While the prospects look bright, analysts suggest against celebrating too soon. “We are not immune to any sharp global exogenous shocks to government bond yields,” cautioned Goenka. “At these levels it’s important to watch global developments and risk-return tradeoff is skewed to the downside," he added.