With the United State’s 10-year yields reaching 4.7% on Friday (21) and India’s 10-year yields reaching 6.7%, developing countries such as Sri Lanka may increasingly face higher capital costs from multilaterals going forward, World Bank Executive Director for India, Bangladesh, Sri Lanka and Bhutan Neelkanth Mishra said, speaking to The Indian Express, in an interview published last week (22).
Referring to the government debt auctions of both nations in the recent past, Mishra said: "The cost of capital itself has changed. There was a time when the US Government bond deal was 2%, India was at 8%. So even after hedging costs, it was cheaper to get capital from IFC and World Bank. That's no longer the case; US 10-year bond yields are 4.7%. You must have seen yesterday's 10-year auction at the record high 2007 levels, and India is at 6.7%.”
As of recent reporting made by international media, the US national debt has crossed $ 40 trillion – the highest in its history – with the government running an almost $ 2 trillion budget deficit.
The cumulative deficit for the first 10 months of the 2026 fiscal year reached $ 1.799 trillion, already exceeding the entire $ 1.775 trillion deficit of the 2025 fiscal year. For the purpose of financing its unsustainable debts, the US Treasury has resorted to issuing a large amount of debt; saturating the market with bonds, pushing prices down, while driving yields up.
The ongoing Iran war, which has introduced an extended period of global oil price volatility, has also prompted investors to demand higher yields on long-term government bonds, recent reporting from Money Control indicates.
Mishra explained that as the differential between US and local bond yields has narrowed significantly, making World Bank loans more expensive after accounting for currency hedging costs – the institution appears to be at a crossroads.
“So after hedging suddenly the risk-free rate in India in rupee terms is not viable. So this is not just the case for India, the same case in Brazil, Indonesia and many other places. So the World Bank’s role itself is changing but what I see as a big opportunity is that the World Bank holds significant expertise," Mishra continued.
Citing the Bank of Japan's interventions to defend the yen and noting that the BOJ may ultimately be forced to raise rates rather than the US cutting rates, Mishra said that there is a high likelihood that the global cost of capital will remain elevated, requiring countries to compete harder for foreign investment.
“We do need to first absorb the fact that the global environment has changed. You must have seen that the yen, despite the interventions, is still under pressure. It seems the Japanese Government may be or the BOJ will be forced to raise rates as well. So instead of the US rates coming down and the Japanese rates having to go up in order to protect the yen – the global cost of capital will remain elevated. If we have to get 1% of GDP of foreign [capital] flows, the beauty parade gets tougher.”