India–US yield gap widens to near 12-month high

markets

After narrowing sharply in June 2025, the yield gap between India’s 10-year government bond and the US 10-year Treasury has widened again to nearly 250 basis points — its highest level in close to a year. Analysts say such a reversal after a steep compression usually reflects diverging rate expectations, currency pressures and shifts in foreign investor appetite.

India’s benchmark 10-year yield is hovering around 6.56 percent, while the US 10-year is trading near 4.10 percent, widening the spread from June’s compressed level of about 189 basis points.

The US bond market is currently priced for at least one more rate cut, which could keep Treasury yields soft. In contrast, investors believe India is near the terminal phase of its easing cycle. Even if the RBI trims rates by 25 basis points, analysts expect limited downside in yields without additional OMO support, given the heavy bond-supply calendar.

According to Venkatakrishnan Srinivasan, Founder and Managing Partner at Rockfort Fincap, the widening spread in India is being driven by three key forces. “First, the recent rupee depreciation has pushed G-sec yields higher as investors demand more compensation for currency risk, which has also dampened FPI participation. Second, uncertainty around potential US tariff actions has hurt risk sentiment and slowed foreign debt inflows at a time when FX markets were already volatile. Third, the steady supply of long- and ultra-long G-secs and SGS bonds is outpacing demand, especially without strong FPI buying,” he said.

Typically, a wider India–US spread would attract stronger foreign interest, especially with India’s bonds now entering the JP Morgan index and set for inclusion in Bloomberg’s Global Aggregate Index.

“But this cycle is different,” experts noted. “Japanese yields have risen sharply, altering global hedging economics. Even at wider spreads, hedged returns in Indian debt are less attractive than usual.”

Analysts believe yields could soften again if the rupee stabilises, clarity emerges on US tariff decisions, OMOs resume, and index-related FPI flows strengthen. They point out that India’s bond market has seen significant yield movements in the past without major policy shifts.

For now, the widening yield gap reflects a mix of local supply pressures, global rate realignment and temporarily subdued foreign demand — rather than any deterioration in India’s underlying economic fundamentals.