Globally, government bond yields are at levels not seen in decades. With every passing day, the sell-off in bond markets deepens. Japan’s 10-year bond yield touched 3% for the first time since 1996. The UK’s 30-year bond yield hit the highest level since 1998. Bond yields in Germany and France rose to their highest levels in more than a decade. On September 11, the 10-year US Treasury yield climbed close to the psychologically important level of 5.0% before edging down.

The J.P. Morgan Emerging Market Bond Index (EMBI), which tracks US dollar-denominated sovereign bonds issued by developing countries, has jumped closer to 7% in terms of yield to maturity. The premium that must be paid over so-called ‘risk-free’ US debt, or the EMBI spread, is widening from multi-year lows.

In spite of the pressure from advanced-economy bond markets and the geopolitical situation, emerging market bonds are displaying some distinguishing features.

First, there is a massive movement of capital from passive index tracking to active management. Fund managers are finding that discretion rather than valour is important to avoid investing into sovereign defaults during periods of global bond market stress.

Second, developing-country sovereign debt is showing a rare resilience relative to advanced-economy debt.

Third, emerging market central banks have demonstrated a readiness to strike pre-emptively against inflation in comparison to their advanced-country counterparts.

Fourth, high yields in emerging bond markets, backed by low to moderate fiscal stress and a growth premium, are creating carry trade attractiveness.

India, which is regarded as an outlier in the EMBI in view of its strong fundamentals and bright growth story, is experiencing an unusual tightening of longer-term bond yields, especially when seen against the crash in shorter-term interest rates under the weight of a massive liquidity overhang.

What are Bond Markets Telling Us?
Since government bond yields are regarded as benchmarks for all other interest rates in the economy, the global surge in bond yields translates into a crippling rise in economy-wide borrowing costs. While the jump in crude prices recently appears to be the trigger and the window letting the war in West Asia into bond market dynamics, are there messages being emitted by bond markets that we should be paying heed to, and are we ignoring them at our peril?

First, the most indebted countries are being punished the most. For advanced economies, all of GDP is insufficient to pay off the average stock of public debt, which is 108% of the former. For emerging market middle-income economies, public debt is 75% of GDP. Excluding China, it falls to 56%. For low-income countries, it is 48%.

Moreover, rising yields are driving up the cost of refinancing existing debt; in the US, interest payments account for half of the budget deficit, with political consequences. But more than the level of indebtedness, markets are reacting to the lack of resolve of governments in advanced economies in preventing the debt from spiralling out of control as the spree of borrowing and spending continues unabated. So pronounced is the credibility evaporation that US yields actually rose after the much-telegraphed Bessent bond buyback as markets thumbed down actual operations falling a little short of announcements, and shrugged off Trump’s threat to send troops against bond vigilantes.

Second, bond markets are assigning greater credibility to monetary policy’s inflation-fighting commitment than to governments’ fiscal management, especially after resolute remarks by the Fed Chair Kevin Warsh at Jackson Hole, a hawkish ECB raising rates and revising inflation forecasts upwards, and several emerging market central banks already in battle-ready mode.

Accordingly, markets have sought to front-run future rate increases, as they always do. In fact, in the US, longer-term bond yields actually stabilised after the September 11 release showed consumer price inflation remaining firm and core inflation rising more than expected. Bond markets appear convinced that they have got it right about future monetary policy and have run ahead enough. Interest rate futures are raising the probability of monetary policy action sooner rather than later.

Third, bond yields could be reflecting capital shortages. Tech giants are spending massive amounts on AI infrastructure and data centres. The AI investment boom has been marked by a frenzy of bond issuances, sucking up capital and leaving less for governments to pick up.

These rich corporate issuers are as creditworthy as, or even more creditworthy than, governments, and so they compete with them in the bond market. Overall, with more debt globally, investors have to absorb the duration risk of a change in bond prices in response to changes in interest rates. Meanwhile, as long-pocket investors like pension funds and insurance companies switch from defined-benefit plans to defined-contribution plans, they look for riskier assets like stocks.

The Curious Case of Indian Sovereign Bonds
Why is the government securities market in India singed by the fire raging across global bond markets? After all, domestic fundamentals are strong and powering the fastest-growing economy in the world. The public debt ratio is climbing down from the pandemic high. Fiscal deficits are narrowing under a determined commitment to consolidation.

Inflation is averaging around the target, including the years of the pandemic, the Russia-Ukraine war and the current unending conflict in West Asia. While crude prices could be a common factor, the external sector is viable, with modest current account deficits and adequate buffers, including a recent bolster.

The story goes back a little way to 2025. In June that year, longer-term bond yields in India staged a structural pivot. From a low of 6.2%, the benchmark 10-year paper’s yield began a sustained upward trajectory, responding more to a moderation in banking system liquidity despite a cash reserve ratio (CRR) cut than to the sizable easing of monetary policy. In retrospect, market expectations perhaps veered to the view that there would be no more open market purchase operations.

Again, in early 2026, the 10-year yield rose past 6.7%, reacting to excess supply of paper following large state debt auctions. In September, the benchmark yield broke through the psychological barrier of 7% as geopolitical conflict flared up again, crude prices crossed $100 per barrel, and domestic inflation risks began to show signs of materialising.

Currently, the short- to medium-maturity bond yields (2–5 years) are spiking the most under heavy selling pressure as liquidity drainage operations gather momentum, against the backdrop of the rejection in the 3-year bond auction of higher-yield bids to cover inflation risk. Defensive strategies of using the overnight index swap to hedge against potential monetary policy tightening are driving aggressive repricing.

The 30-year bond yield has also displayed dramatic shifts. After the yield fell or remained stable for the greater part of 2025, a turning point occurred in October that year after the cancellation of an auction in which investors demanded significantly higher yields. A heavy supply of the paper till then had created fatigue among insurance companies, provident funds and pension funds. The ramping up of state development loan issuances in the second half of 2025, global spillovers and the growing sentiment that monetary policy accommodation is coming to an end as inflation expectations rise have all taken their toll.

The point is: are the messages being heard?