US bond yields surge: How will they impact your NPS debt returns?

The US 10-year Treasury yield is hovering close to 5%, while the 30-year yield is above 5.2%. On September 22, the 10-year US Treasury yield stood at 4.96% and the 30-year yield at 5.29%, according to US Treasury data.

The US Federal Reserve raised its policy rate by 25 basis points on September 16 to 3.75%-4%. It was the Fed’s first rate hike since 2023. Policymakers have also indicated the possibility of another increase this year.

Back in India, the benchmark 10-year government bond yield has also moved up. It is above 7%, marking its fifth consecutive weekly rise.

For an NPS investor, this matters because a part of the retirement corpus may be invested in Corporate Bonds or Government Securities. When market yields rise, prices of existing bonds generally fall. This can create short-term volatility in the NAV of debt portfolios.

But does that mean NPS investors should reduce their debt allocation?

Not necessarily.

“Higher global bond yields can create intermittent pressure on Indian bond yields; however, NPS is a long-term retirement product, and debt allocation should not be driven by short-term global market movements,” says Abhishek Goenka, Chief Investment Officer, PPFAS Pension Fund Managers Private Limited.

Why US bond yields matter for Indian debt?

US Treasury yields are closely watched across global financial markets. When yields on US government bonds rise, global investors may reassess the returns they expect from other markets, including emerging markets such as India.

This can influence capital flows, currencies and interest-rate expectations. But Indian bond yields do not simply move in line with US Treasury yields.

Domestic inflation, RBI policy, government borrowing, liquidity and demand for government securities remain important factors.

Goenka says the trajectory of Indian bond yields depends more on “domestic inflation, RBI policy, fiscal conditions and demand for government securities”.

This distinction is important for NPS investors.

A rise in US yields does not automatically mean that Indian bond yields will rise by the same amount. But if higher US yields are accompanied by a weaker rupee, higher crude oil prices or stronger inflation pressures, the pressure on Indian rates can increase.

What happens to your NPS debt allocation when yields rise?

The basic relationship between bond yields and prices is important here. When market yields rise, the prices of existing bonds generally fall. When yields fall, existing bond prices generally rise.

So, if an NPS pension fund holds bonds that were bought earlier at lower yields, a sharp rise in market yields can temporarily reduce their market value. The impact can be greater for bonds with longer maturities because their prices are generally more sensitive to changes in interest rates.

For NPS subscribers, this can show up as short-term movement in the value of the Corporate Bonds and Government Securities schemes.

Rajesh Khandagale, SVP – NPS, KFin Technologies Limited, says the impact of elevated US yields on Indian NPS portfolios will primarily come through the underlying debt markets.

“When market yields rise, prices of existing bonds can come under pressure, which may result in some near-term volatility in the valuation of debt portfolios,” he says.

However, the extent of the impact will depend on the maturity and duration of the securities, their credit quality and the domestic interest-rate environment, he adds.

This means an NPS investor should not look at the US 10-year yield in isolation. The more relevant question is what happens to Indian bond yields and the securities held by the pension fund.

Could higher US yields push Indian bond yields higher?

There can be a transmission effect. Higher US yields can affect global capital flows and investor risk appetite. If global investors demand higher returns from emerging markets, Indian bond yields could also come under pressure. But several domestic factors are currently important.

Crude oil prices, the rupee, inflation, liquidity and the government’s borrowing programme are all being watched closely by the bond market.

The RBI has also been withdrawing excess liquidity from the banking system. Reuters reported that the central bank had reduced the banking system’s liquidity surplus significantly through bond sales, foreign exchange swaps and other measures.

The Indian government is also preparing its borrowing calendar for the second half of the financial year. The size and composition of government borrowing can influence bond supply and yields.

Khandagale says inflation expectations, liquidity conditions, government borrowing, crude oil prices, currency movements and domestic growth can all influence the RBI’s monetary policy stance.

“Any increase in the interest rates will have a direct impact on the underlying portfolio values in Corporate Bonds (C) and Government Securities (G),” he says.

RBI rate hike expectations add another layer

The next major trigger for Indian bond investors is the RBI’s monetary policy. Market expectations for a rate hike have increased after the Fed’s move and amid concerns around inflation, crude oil prices and the rupee.

A Times of India poll of 12 economists found that a majority expected the RBI to raise the repo rate by 25 basis points at the October policy meeting. Some economists, however, expected the RBI to remain on hold and wait for more data.

That means the RBI hike should be seen as a market expectation rather than a certainty.

The current repo rate is 5.25%. If the RBI does raise rates, Indian bond yields could face further pressure, particularly if the market had not fully priced in the move.

For NPS investors, this could mean some short-term volatility in debt scheme valuations. But there is another side to higher yields. Higher yields also mean that new bonds can be bought at better yields. Over a longer period, this can improve the accrual income available to debt investors.

Goenka points to this aspect. “At the same time, higher yields can provide attractive accrual opportunities for long-term debt investors,” he says.

This is an important point for retirement investors. A temporary fall in bond prices is not the same thing as a permanent loss of the retirement corpus.

Should NPS investors change their debt allocation?

This is perhaps the most important question for subscribers. The current global interest-rate environment may look very different from what investors were used to during the low-rate period. But changing NPS allocation every time bond yields move can create a different problem.

The NPS is designed for long-term retirement investing. Goenka says investors should align their asset allocation with their age, risk appetite and retirement horizon rather than short-term movements in global yields.

In other words, someone who is still decades away from retirement has a different investment horizon from someone who is due to retire in the next few years.

The decision should therefore not be based simply on whether the US 10-year yield is at 5% or whether India’s 10-year yield is above 7%. It should be based on whether the overall NPS allocation is appropriate for the investor’s retirement goal and risk tolerance.

What should NPS investors watch now?

There are a few indicators worth tracking.

US 10-year Treasury yield: It remains close to 5%. A sustained move higher could keep global bond markets under pressure. US 30-year Treasury yield: At around 5.29%, the long end of the US yield curve remains elevated.

Indian 10-year government bond yield: The benchmark has been around the 7% level and recently recorded its fifth consecutive weekly rise.

RBI policy: Investors will watch the October policy for any change in rates or the central bank’s stance.

Crude oil: Higher oil prices can increase India’s import bill and add to inflation and currency pressures.

Liquidity: RBI liquidity operations can also influence bond yields and market conditions.

Don’t try to time the bond market

NPS gives subscribers flexibility to choose their asset allocation through Active Choice. Under Auto Choice, the allocation changes with age.

That structure is meant to reduce the need for investors to constantly make tactical decisions based on market movements.

Khandagale says the current global interest-rate environment is an important factor to monitor, but it need not by itself warrant frequent changes to asset allocation.

“For long-term retirement investors, maintaining an appropriate asset allocation and reviewing it periodically can be more relevant than attempting to time interest-rate cycles,” he says.

This is particularly relevant for NPS investors because the objective is not to predict where the US Treasury yield will be three or six months from now. The objective is to build a retirement corpus over several years.

The takeaway for NPS investors

Higher US bond yields can create pressure on Indian bond yields. The recent Fed rate hike has added to the focus on global interest rates, while domestic factors such as crude oil, inflation, liquidity and the rupee are also keeping Indian bond investors cautious.

For NPS investors, this can mean some short-term volatility in the Corporate Bonds and Government Securities schemes.

But that does not automatically mean investors should move out of debt. The more important question is whether the allocation is suitable for their age, risk appetite and retirement horizon.

As Goenka puts it, NPS is a long-term retirement product and debt allocation should not be driven by short-term global market movements. For investors with a long retirement horizon, the current higher-yield environment also creates an opportunity for fresh investments to earn higher accruals over time.

The key is to keep an eye on the interest-rate cycle without allowing every move in the US or Indian bond market to dictate a long-term retirement decision.

Disclaimer: This story is for informational purposes only and should not be treated as investment advice. NPS subscribers should consider their retirement horizon, risk appetite and overall asset allocation before making investment decisions.

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