India-US bond yield spread narrows, prompting Uday Kotak to wonder if a historic flip is coming

The Federal Reserve’s continued hawkish stance, despite calls for rate cuts, has also heightened the cost of servicing US debt.

Uday Kotak, founder and director of Kotak Mahindra Bank, has pointed at a subtle but potentially meaningful shift in global financial markets, as he captured the narrowing spread between the 10-year government bond yields of Indian and the USA.

The veteran banker said in a post on social media platform X that India’s 10-year bond yield stands at 6.25 percent, while the US 10-year Treasury yield is up 4.60 percent, narrowing the gap to just 165 basis points - a level described as ‘probably the lowest I recollect’.

The spread between the two benchmark yields has fallen to a more-than-two-decade low, driven largely by a spike in US yields. This surge follows growing concerns over America’s fiscal health, especially after the progress of President Trump’s tax and spending bill in Congress - a move expected to further widen the federal deficit.

Adding fuel to the rise in US yields was a poor response to a $16 billion auction of 20-year Treasury bonds, which saw tepid investor demand and led to higher-than-expected coupon rates. The US Federal Reserve’s continued hawkish stance, despite calls for rate cuts, has also heightened the cost of servicing debt, prompting investors to offload bonds and driving yields higher.

Historically, the yield gap has been far wider, reflecting India’s higher inflation, perceived risk, and macroeconomic volatility with respect to the US. With India’s inflation staying relatively contained and robust foreign portfolio flows coming into the debt market, the traditional premium is getting compressed.

Kotak also posed a provocative question in his post. “Will we one day see Indian yields lower than the US?” While such a reversal has long seemed improbable, he suggested that changing dynamics - particularly around inflation, risk perception, investor trust, and liquidity - could one day tilt the balance in India’s favour.

While US bond yields remain under pressure from fiscal concerns and central bank policy, India appears to be on a steadier footing, benefiting from macroeconomic stability and consistent foreign inflows.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.