NEW DELHI, Feb 3
The bond market reacted sharply on Monday as the benchmark 10-year government bond yield climbed to its highest level in more than a year, a day after Finance Minister Nirmala Sitharaman presented the Union Budget and announced a record gross borrowing plan for 2026–27.
The 10-year yield rose by as much as 8 basis points to 6.78 per cent, its highest since January 17, 2025, and marked the steepest intraday rise since August 29, 2025. Over the past month, the yield has increased by 17 basis points. The yield closed with a gain of 6.77 per cent, still up by 7 bps. Rising yields signal falling bond prices, reflecting selling pressure from investors.
The sell-off followed the Finance Minister’s announcement on Sunday of a larger-than-expected gross market borrowing of Rs 17.2 lakh crore through dated securities for FY27, a 17 per cent increase over the previous year.
“The higher gross borrowing target of Rs 17.2 lakh crore is the key variable to watch and could keep government bond yields under mild pressure in the near term until supply dynamics become clearer,” said Saurav Ghosh, co-founder of Jiraaf, a bond market platform.
Trigger for the surge in yields Higher yields indicate rising funding costs across the financial system.
As yields climb, the government must offer higher returns to attract investors, increasing its borrowing costs. This, in turn, puts upward pressure on interest rates across the banking system, affecting loans, deposits, and overall liquidity conditions. Analysts say the rise in yields reflects expectations of sticky inflation and the possibility that interest rates may remain elevated or even rise further. Persistently higher yields can intensify upward pressure on interest rates and may also prompt a shift in savings from bank fixed deposits to sovereign bonds, as the yield gap widens in favour of government securities.
The bond market is awaiting the Reserve Bank of India’s monetary policy on Friday for further guidance on the yield movement. The market expects RBI liquidity support to keep bond yields in check, according to Amit Modani, Senior Fund Manager, Shriram AMC.
Impact on bond investors
Rising yields typically mean investors expect higher interest rates ahead and therefore sell bonds they already hold. Since bond prices move inversely to yields, higher rates reduce the market value of existing bonds, leading to potential capital losses for investors who exit before maturity.
Debt investors are likely to feel the impact. As bond prices fall, the net asset values (NAVs) of debt mutual funds, especially those with significant exposure to government securities, tend to decline. Corporate bonds, which are priced at a spread over government securities, also come under pressure as benchmark yields rise.
Bond yields represent the annual return an investor expects to earn by holding a security until maturity, taking into account both interest payments and the principal repayment relative to the purchase price. Because bond prices and yields move in opposite directions, a rise in yields automatically translates into lower bond prices in the secondary market.
Higher bond yields can also have spillover effects on equity markets, as rising interest rates increase financing costs for companies and make fixed-income investments relatively more attractive, potentially dampening equity valuations.
