Changes to monetary policy have a stronger impact on yields of short-term bonds than on longer-dated securities.
That long-held view received an emphatic backing from researchers in the Reserve Bank of India. An empirical study covering moves from April 2004 to March 2018 showed the impact of policy rate on yields weakens as the tenure of the bonds increases.
The impact on shorter maturities builds over time and the peak impact occurs with a lag of around six months. For five- and 10-year maturities, there is an over-shooting of yields in the initial month as markets seem to absorb the news and implications of a rate hike. That is corrected in the next couple of months.
The size of government borrowings and crude prices also influence yields up, but they differ across maturities.
Also, an increase of one percentage point in foreign portfolio investment in debt instruments softens one-, five- and 10-year domestic bond yields by 10-23 basis points, with no significant impact on short-term treasury bills. That highlights a view that unlike the policy rate, foreign portfolio investments impact longer-term yields more than shorter-term yields.