Why did the bond yields move up sharply on 11 May in the bond markets?

There were several reasons for the bond yields to harden by over 22 bps in a single day. This is the sharpest spike in yields in a single day since 2017. Here are some key takeaways.

· Sovereign bonds prices tumbled by the most in over 3 years after the government enhanced annual borrowing target by over 50%

· The yield on 10-year bonds climbed 22 basis points from 5.97% to 6.19% on Monday. This was after the borrowing limit was hiked from Rs.7.8 trillion to Rs.12 trillion

· One thing this trend indicates is that global investors could get spooked by this sudden surge in borrowings, which crashed bond prices

· There is also the risk that corporate borrowers will get crowded out or they may end up paying higher interest costs

· One way out is to monetize the deficit with the central banks buying bonds directly from the government. That has not been allowed since 1997

· Fiscal deficit is also expected to shoot through the roof due to the sharply higher borrowings and it could now end up closer to 6%

· Most rating agencies like Moody’s and Fitch have already warned of a likely downgrade of India sovereign debt.