If one has to elucidate in easy phrases, bond yield means the returns an investor will derive by investing within the bond. The mathematical formulation for calculating yield is the annual coupon price divided by the present market value of the bond. Due to this fact, there’s an inverse relationship between the yield and value of the bond. As the value of the bond goes up, the yield falls; and because the value of the bond goes down, the yield goes up.
If you’re investing in debt devices equivalent to debt mutual funds, you will need to perceive the idea of bond yield, as a motion in bond yields displays the adjustments within the costs of the bonds. As debt funds need to worth their debt holding on market value, a fall in bond costs might lead to mark-to-market losses. It will affect the returns of the debt funds.
In India, the yield of 10-year authorities securities (G-Sec) is taken into account the benchmark and reveals the general rate of interest state of affairs. This 12 months, G-Sec yields have gone up in comparison with the earlier 12 months after the Centre introduced its elevated borrowing programmes in Funds 2021. As authorities borrowing goes up, the availability of bonds available in the market goes up, placing stress on costs. The federal government has introduced a borrowing of ₹12 trillion in FY22.
To manage the rise in yields, the RBI has introduced a secondary market authorities safety acquisition programme, or GSAP, whereby it is going to purchase authorities bonds value ₹1 trillion from the secondary market in Q1 FY22. If bond yields go down, returns of debt MF traders might go up.