High government fiscal deficit is pushing up bond yields
The Union Budget 2021-22 saw the government peg fiscal deficit, which is the difference between revenue and expenditure of the government, at 9.8% of GDP for the fiscal year 2020-21 and 6.8% of GDP for fiscal 2021-22, which are very high numbers and not seen at least in the last 15 to 20 years. The government borrows from the bond market by issuing bonds to finance the deficit and high borrowing and less demand for bonds are leading to rising yields on bonds in the market.
Corporate bond yields too will rise
Corporate bond yields are pegged to government bond yields and any rise in government bond yields will also push up yields on corporate bonds. Corporate bond market does not have the same depth and liquidity of the gpvernment bond market and hence yields on corporate bonds tend to rise more than the rise in yields on government bonds, which in bond market parlance is termed as rising credit spreads.
Higher corporate bond yields give higher returns to bond investors
When corporate bond yields rise, investments in bonds at higher yields give extra returns. For example if a bond was giving return of 7% per annum and yields rise to 8% investors investing in the bond at 8% yield, receive higher interest of 8% per annum. With banks not raising FD rates, investors can then look to invest in good quality corporate bonds for higher returns.
