India's 10-year government bond yield has climbed to 6.93% as of March 27, 2026 — its highest level since July 2024. This isn't just a number on a screen. For public sector banks, it's a direct hit to their bottom lines through something called mark-to-market (MTM) losses.
Here's the deal: when bond yields go up, bond prices go down. Banks hold massive portfolios of government bonds, and when those bonds lose value, they have to account for it. The impact varies wildly across banks, and that's exactly what we're seeing play out in the stock market.
The key to understanding this divergence lies in how banks classify their bond investments. There are three main buckets:
Held-to-Maturity (HTM): These bonds are held until they mature. Their value doesn't fluctuate on the books, so rising yields don't hurt profits.
Available-for-Sale (AFS): These bonds can be sold, but their value is marked to market. When yields rise, these losses show up in the books.
Fair Value Through Profit or Loss (FVTPL): These are trading book securities. Price changes hit profits directly.
The more a bank has in AFS and FVTPL, the more vulnerable it is to rising yields. And this is where the story gets interesting.
Punjab & Sind Bank and UCO Bank are getting hammered. Punjab & Sind Bank has only 46.40% of its investments in the safe HTM category. That means more than half of its portfolio is exposed to MTM volatility. Compare that to peers who keep 70-77% in HTM, and you see the problem.
The numbers tell the story. Punjab & Sind Bank's stock has plunged 53% over the past year and is down 21% in 2026 alone. UCO Bank isn't far behind, with a 35% drop over the year and a 20% decline in just the last month.
These banks also have weaker fundamentals. Punjab & Sind Bank's return on equity (ROE) is just 7.03%, while UCO Bank manages 8.50%. Contrast that with State Bank of India at 17.20% or Canara Bank at 17.76%, and you understand why investors are fleeing the smaller players.
The large PSU banks aren't immune, but they're built differently. Bank of Baroda faces estimated MTM losses of ₹2,300-2,700 crore given its AFS exposure, but it's been proactive. The bank sold ₹28,000 crore of investments in Q3 to position itself better.
State Bank of India has indicated it has no significant MTM concerns at current yield levels. Its small FVTPL and HFT book limits direct earnings impact. Even Canara Bank, despite having higher FVTPL exposure, maintains a solid 77.21% HTM cushion.
The stock performance reflects this resilience. SBI is down only 2-3.5% in 2026, Canara Bank has actually gained 47% over the past year, and Bank of Baroda is up 17% over the same period.
This yield surge isn't happening in a vacuum. The government announced record gross market borrowing of ₹17.2 lakh crore for FY27 — a 17% increase from the previous year. Add to that excise duty cuts of ₹10 per litre on both petrol and diesel to cushion consumers from soaring crude prices, and you have a recipe for fiscal pressure.
Higher borrowing needs mean more bond supply, which pushes yields up. The 10-year yield has jumped 40 basis points recently, and analysts expect it to stay elevated in the 6.7-7.2% range.
Here's something counterintuitive: rising yields might actually help some banks' net interest margins (NIMs). When market rates go up, banks can reprice their loans faster than their deposits. Punjab National Bank, for instance, boasts the highest NIM at 3.06%, thanks to strong loan pricing power and a healthy CASA ratio of 37.29%.
But this NIM benefit doesn't offset the treasury volatility for weaker banks. The market is looking at the whole picture, and for banks like Punjab & Sind Bank and UCO Bank, the treasury risks outweigh any potential NIM gains.
Investors are rotating toward quality. Canara Bank stands out with the best asset quality metrics — gross NPAs at just 2.08% and a provisioning coverage ratio of 94.19%. It's no surprise that despite the recent volatility, Canara Bank has delivered a 47% return over the past year.
The Nifty PSU Bank index is down 17% from its peak, but this masks the divergence within. The index is market-cap weighted, so SBI's relatively stable performance cushions the blow. Look at individual stocks, and the pain is concentrated in the smaller, weaker players.
The geopolitical situation remains tense with crude prices hovering around $100-119 per barrel. The RBI has signaled a pause in rate cuts, which means policy rates will stay at 5.25% for now. Bond yields are likely to remain elevated, keeping MTM pressure on bank portfolios.
For investors, the lesson is clear: not all PSU banks are created equal. The banks with strong HTM cushions, robust fundamentals, and reasonable valuations will weather this storm. The ones with weak treasury structures and poor profitability face a rougher road ahead.
