India-US Bond Yield Gap Narrows to 20-Year Low

The gap between Indian and US 10-year government bond yields has shrunk to around two percentage points, approaching a 20-year low. This narrowing gap reflects a significant reduction in the inflation differential between the two economies, suggesting that India may sustain a lower yield premium over US Treasuries, according to a report by Jefferies India Equity Strategy.

Jefferies noted that India’s 10-year government security yield has increased by about 50 basis points over the past two months, in line with rising global bond yields. The India-US bond yield gap is a key metric for global investors, influencing the relative returns and risks of investing in both markets.

The report highlighted that while the yield differential is near 20-year lows, the inflation gap between India and the US has also narrowed substantially over the past decade. During FY07-FY16, India’s consumer price inflation averaged 6.1 percentage points higher than US inflation, but this gap has since shrunk to around 1.5 percentage points during FY17-FY26.

Jefferies suggested that the structural decline in the inflation differential could allow Indian government bonds to offer a lower yield premium over US Treasuries than in the past. This assessment comes as bond yields have risen globally, with the US 10-year Treasury yield surpassing 5 percent and Japan’s 10-year yield crossing 3 percent. Indian bond yields have also increased due to expectations of tighter monetary policy.

The brokerage concluded that the current lower bond yield differential may be more sustainable than in previous periods, even with recent rises in Indian bond yields. This indicates that the premium over US Treasuries may not need to return to historical levels.