India-US Bond Yield Gap Hits 20-Year Low as Inflation Differential Narrows

The gap between Indian and US 10-year government bond yields has narrowed to around two percentage points, approaching its lowest level in nearly 20 years. This shift is notable as it reflects a significant reduction in the inflation differential between the two economies over the past decade. According to a report by Jefferies India Equity Strategy, this narrowing gap suggests that India may be able to maintain a lower yield premium over US Treasuries moving forward.

Jefferies noted that India’s 10-year government security yield has risen by approximately 50 basis points over the past two months, aligning with the increase in global bond yields. The India-US bond yield gap is closely monitored by global investors as it impacts relative returns and investment risks between the two markets. Despite the yield gap reaching near 20-year lows, the inflation differential between India and the US has also significantly decreased.

Historically, India’s consumer price inflation was about 6.1 percentage points higher than US inflation from FY07 to FY16. However, this gap has sharply narrowed to around 1.5 percentage points from FY17 to FY26. Jefferies suggests that this structural decline in the inflation differential could allow Indian government bonds to sustain a lower yield premium over US Treasuries compared to past periods.

The analysis comes amid rising bond yields across major global markets. The US 10-year Treasury yield has surpassed 5%, while Japan’s 10-year government bond yield has crossed 3%. Bond yields in the UK and Germany have also increased. Indian bond yields have also risen, with the 10-year government bond yield increasing by about 50 basis points over the past two months, partly due to expectations of tighter monetary policy. Jefferies concludes that the current lower bond yield differential between India and the US may be more sustainable than in earlier periods.