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Context:

Trump's economic policies shake global bond markets, triggering inflation fears and capital shifts.

Bond Markets

Bonds are financial instruments that promise a fixed return (face value) at maturity, issued by governments, corporations, or institutions.

Unlike equity, bonds offer lower risk with predetermined returns. The price of bonds in the market is inversely related to yield—when bond prices fall, yields rise.

Two major factors affect bond values:

1. Inflation -> Higher inflation erodes the real returns of bonds. If inflation exceeds bond yields, investors lose value in real terms.
2. Currency values -> For international investors, currency depreciation can eliminate gains from bond yields.

Tariffs cause inflation in the short term by:

• Increasing prices of imported goods.
• Reducing competition for domestic producers, allowing them to raise prices.
• Disrupting supply chains and increasing production costs.

Implications for Various Stakeholders

For the U.S. Economy

• Higher interest rates could slow economic growth and investment.
• Rising inflation may reduce consumer purchasing power.
• Political interference with the Federal Reserve threatens the foundation of U.S. financial stability.

For Developing Economies

• Loss of export markets due to trade disruptions.
• Potential capital flight as investors seek safe havens.
• Increased pressure on local currencies and bond markets.
• Restrictions on social spending and welfare programs due to market pressure.

For Global Financial Markets

• Increased uncertainty and volatility.
• Shifting patterns of capital flows as investors seek stability.
• Reconsideration of the dollar's role as a global reserve currency.
• Potential for broader financial crises if instability continues.

About Indian Bond Market

The Indian Bond Market is a crucial segment of the financial system where government entities, corporations, and financial institutions raise funds by issuing bonds. Investors provide loans to the issuers and, in return, receive periodic interest payments and principal repayment upon maturity.

Structure of the Indian Bond Market

Primary Bond Market

In the Primary Market, new bonds are issued by the government, corporations, or financial institutions to raise capital.

• Government Securities (G-Secs) -> Bonds issued by Central and State Governments, including Treasury Bills (short-term) and Government Bonds (long-term).
• Treasury Bills (T-Bills) -> Short-term government securities with maturities of 91, 182, or 364 days.
• Corporate Bonds -> Bonds issued by private or public companies, credit-rated based on their creditworthiness.
• Municipal Bonds -> Issued by local governing bodies for funding public infrastructure projects.
• Public Sector Undertaking (PSU) Bonds -> Bonds issued by government-owned corporations.
• Green Bonds -> Dedicated bonds for financing environmentally sustainable projects.
• Masala Bonds -> Rupee-denominated bonds issued in foreign markets.

Secondary Bond Market

In the Secondary Market, previously issued bonds are traded among investors.

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Source: 

 THE HINDU