Veteran banker Uday Kotak has warned that rising U.S. bond yields are emerging as a crucial macro risk for global financial markets, with the benchmark U.S. 10-year Treasury yield rising by 44 basis points (bps) so far in calendar year 2026.

In a post on X, Kotak, founder and director of Kotak Mahindra Bank, said the U.S. 10-year Treasury yield has climbed sharply from 4.16% on January 1, 2026, to around 4.60% now, reflecting increasing stress around America’s massive borrowing programme as U.S. debt approaches $40 trillion.

“A crucial macro factor today is US 10-year bond yields. They have moved up from 4.16% on January 1, to 4.60%. It reflects increasing strain for US borrowing program as US debt nears $40 trillion. When the US sneezes, world gets a cold. Watch out for bond yields around the world,” Kotak said.

U.S. 10-year Treasury yield near a 16-month high

On Monday, the U.S. 10-year Treasury yield was trading around 4.63%, near a 16-month high, amid persistent inflation concerns, elevated crude oil prices and expectations that the U.S. Federal Reserve could maintain a tighter monetary stance for longer.

Analysts said recent CPI and PPI data indicate that the ongoing global energy shock is keeping inflationary pressures elevated in the United States, the world’s largest economy. Brent crude oil prices have surged above $111 per barrel due to escalating geopolitical tensions in the Middle East, intensifying fears of prolonged energy-led inflation.

Markets have consequently scaled back expectations of U.S. rate cuts, with traders now increasingly pricing in the possibility of another Federal Reserve rate hike by March 2027. Some market participants also see a rising probability of a rate increase before the end of 2026.

Impact of U.S. bond yields on Indian markets

The spike in U.S. bond yields has triggered sell-offs across global equity markets and pushed sovereign bond yields higher in countries including India and Japan. In India, the 10-year government bond yield remained volatile through FY26, starting at around 6.40% in April 2025 and inching higher in the second half to 6.75% by March 2026.

Dipanwita Mazumdar expects India’s 10-year government bond yield to trade in the 6.9–7.10% range in the near term, with an upward bias unless geopolitical tensions ease.

For India, higher U.S. yields pose multiple challenges, including pressure on equities, currency weakness and rising domestic borrowing costs. Higher Treasury yields make U.S. assets more attractive relative to emerging markets, prompting foreign institutional investors (FIIs) to pull capital out of markets like India.

According to NSDL data, FIIs have pulled out ₹27,177 crore from the Indian cash market in the first half of May 2026. So far in calendar year 2026, FIIs have remained net sellers every month, offloading equities worth more than ₹2.31 lakh crore.

FIIs sold ₹41,435 crore worth of shares in January and ₹6,641 crore in February, while selling accelerated sharply to a record ₹1.23 lakh crore in March amid escalating geopolitical tensions linked to the US-Israel-Iran conflict. Net outflows moderated to ₹70,135 crore in April.

According to market analysts, near-term sentiment is likely to remain volatile amid concerns over crude oil prices, currency weakness and global bond yields. However, any easing in geopolitical tensions could trigger relief rallies, supported by resilient domestic fundamentals and stable DII inflows.

Vishal Goenka, co-founder, IndiaBonds.com, said rising U.S. bond yields are having a direct spillover effect on global interest rates and currencies. “US 10-year government bond yields have moved aggressively from the lows of 3.95% in February-end to 4.62% this morning. US interest rates determine the global benchmarks for interest rates and impact FX,” he said.

“Due to the Middle East geopolitical situation and its impact on oil prices, India would likely have to hike interest rates soon in the face of growing inflationary pressures in the economy. Retail oil-related prices have already started being revised upwards since last week,” he added.

Goenka also suggested that tax rationalisation on bond investments could help offset the impact of rising rates and support domestic capital formation.

“A good way to offset the impact of rising interest rates would be for tax equalisation of interest income in bonds to be capped at 20%, the highest rate for equities, from the current slab rate. This would encourage demand for fixed income in the country and unlock household balance sheets to support capital formation in the economy,” he said.