Global Markets Rattle as U.S. Bond Yields Spike

A sharp rise in U.S. Treasury yields has shaken global financial markets. The 10-year yield is now brushing up against 5%, a level we haven’t seen since 2007. And that’s got investors everywhere on edge. Stocks, currencies, and bonds are all taking hits, and emerging markets like India feel the worst.

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U.S. Bond Yields Surge on Fiscal Fears

On May 21, yields on U.S. government bonds climbed sharply. The 10-year hit 4.595%, and the 30-year went above 5%, mainly in response to a weak $16 billion auction of 20-year bonds. The lack of buyer interest is telling: investors are worried about the growing fiscal problems in the U.S. President Trump’s $3.3 trillion tax-and-spending plan and historically high tariffs, now at 17.8%, the most since 1934, have only added to the unease.

This jump in yields makes borrowing more expensive and challenges the long-standing belief that U.S. government bonds are a safe bet. Analysts say big deficits aren’t just a red flag anymore; they’re starting to push investors away.

India Feels the Heat

India’s markets took a heavy hit. The Sensex dropped 826 points, the worst single-day fall since July 2023. The Nifty 50 followed suit, slipping by 261 points to close at 19,282.

And the rupee? It sank to a record low of 86.5963 per U.S. dollar, its most significant single-day fall this year. With inflation still a worry and foreign investors pulling out over ₹61,000 crore (around $7.3 billion) in 2025, pressure is mounting.

India’s 10-year bond yield also rose to 6.85%, making it more expensive for the government and businesses to borrow money. That’s bad news for real estate and infrastructure sectors, which depend heavily on loans.

Foreign Investors Are Pulling Out

Why are investors leaving? Simple: U.S. Treasury bonds now offer higher, safer returns. In August alone, foreign institutional investors (FIIs) sold more than ₹13,000 crore in Indian equities.

In 2022, Indian bonds looked attractive with a 5% yield gap over U.S. bonds. Now? That gap has shrunk to 2.7%. Less reward, same risk, so investors are turning away.

Global Shockwaves

The spike in U.S. bond yields hasn’t just hit India; it’s rattled markets worldwide.

Japan’s Nikkei 225 dropped 1% in Asia, Hong Kong’s Hang Seng fell 0.9%, and South Korea’s Kospi slipped 1.1%. Over in Europe, the STOXX 600 also saw significant losses.

The U.S. isn’t immune either. All major indices had their worst day in a month: the Dow Jones fell 1.9%, the S&P 500 slid 1.6%, and the Nasdaq dropped 1.4%.

What This Means for India

This whole episode reminds us that global markets are deeply connected. Fiscal instability in the U.S. can send shockwaves far and wide.

For India, the focus now shifts to stabilizing the rupee, keeping inflation in check, and holding investor trust. The Reserve Bank of India (RBI) is walking a tightrope. Raise interest rates to support the rupee, and you might slow down growth. Do nothing, and more money could leave.

Governor Shaktikanta Das has made it clear that any action will be based on hard data and a close eye on global trends. The good news? India has more than $620 billion in foreign reserves. Being added to JP Morgan’s GBI-EM Index in late 2024 could attract more global investment. Still, if U.S. rates keep climbing and the dollar strengthens, that might not be enough.

Domestic investors should be ready for more short-term turbulence. Export-heavy sectors like IT and pharma may gain from the weak rupee. But those that rely on imports or big loans could feel more pain.

Big Picture: A Risk That’s Going Global

If U.S. interest rates stay high, pressure on global markets will only build. Countries buried in debt or reliant on foreign funds could find themselves in a tight spot. Central banks might have to raise their interest rates in response, even if it risks slowing down their economies.

Bottom line? This isn’t just a U.S. problem. Rising yields are now a global risk. And the world is watching closely to see what the U.S. does next.