The decline in Sovereign Bond Yield is mainly due to recent transfer of record-high dividend payout of Rs 2.11 lakh crore by RBI to the Government. It will strengthen financial position of government.
- Furthermore, a fall in crude oil prices has also improved market sentiment and spurred buying interest in bonds.
- Overall, these have led to increased prices of bonds and lowered yield (Refer to box).
Sovereign Bond
- It is a specific debt instrument issued by the government. It can be denominated in both foreign and domestic currency.
- It promises to pay the buyer a certain amount of interest for a stipulated number of years and repay the face value on maturity.
- These bonds are preferred by governments to meet their expenditure as they are similar to taking loans from the market.
- Yield of Sovereign Bond is dependent on primarily given factors –
- Creditworthiness: The issuing countries’ perceived ability to repay their debts.
- Country Risk: External/Internal factors like unrest and wars tend to jeopardize a country’s ability to pay (Current account deficit etc.).
- Exchange Rates: Countries with volatile economies and high inflation rates have to issue higher interest returns on their bonds compared to more stable ones.
Bond Yield
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