Here are the key factors behind the move:
1. West Asia tensions push up oil prices
US forces earlier launched fresh strikes against Iran, while a tanker was struck by unknown projectiles off the coast of Oman in the Strait of Hormuz.
The escalation pushed crude prices higher, with West Texas Intermediate futures rising more than 1% to above $87 a barrel and Brent crude gaining more than 1% to above $92.
With no clear path to reopening the Strait after months of war, concerns over inflation have remained elevated.
2. Uncertainty over the Fed’s policy outlook
Investors are also assessing the outlook for US monetary policy amid persistent inflation concerns. The 2-year Treasury yield, which typically moves in line with expectations for Federal Reserve interest-rate decisions, rose to around 4.36%.
3. Fiscal concerns
Fiscal concerns have also kept pressure on the US bond market, particularly longer-dated Treasuries. The 30-year Treasury yield rose above 5.27% on Tuesday as investors continued to assess the outlook for government borrowing and debt issuance.
4. Rising AI-related debt issuance
Increasing debt issuance linked to investments in artificial intelligence is another factor weighing on bonds. The rise in borrowing for AI-related infrastructure adds to pressure on the fixed-income market, according to UBS.
5. Investors await US economic data
Markets are also watching the G20 finance ministers’ meeting in Asheville, North Carolina, as well as upcoming US economic data, including the ISM Manufacturing PMI and Job Openings and Labor Turnover Survey.
The nonfarm payrolls report, one of the key indicators for the Fed’s policy outlook, is due later this week.
What does this mean for India?
Higher US Treasury yields can make dollar-denominated assets more attractive relative to emerging-market assets such as Indian equities and bonds. This can encourage foreign investors to shift capital towards US Treasuries, putting pressure on the Indian rupee and potentially increasing volatility in Indian markets.
A weaker rupee can make imports such as crude oil more expensive, adding to domestic inflationary pressures. Higher US yields can also put upward pressure on Indian bond yields, potentially raising borrowing costs and limiting the Reserve Bank of India‘s flexibility on interest rates.
Foreign investor flows are another key channel. Higher US yields, along with geopolitical tensions and rising oil prices, have contributed to foreign selling in Indian equities. However, domestic institutional flows, supported by retail mutual fund and SIP investments, have provided a counterbalance to FPI outflows.
