Understand how the increase in US bond yield will affect Indian equity and debt markets.
Changes in US bond yields can have a significant effect worldwide. Changes in bond yield can have an impact on other investments as well. Whether bond yields go up or down depends on many things, like what central banks are doing and how the economy is doing.
Investors and experts keep a close eye on bond yields because they can affect the stock market and other investments. It is important to know that when bond yields go up, it can be tough for some investments, but others might do better.
So, why are we talking about bond yields today? It is because there has been a big spike in US bond yields.
In this article, we will figure out how this might affect other types of investments, especially Indian stocks.
What’s Happening?
On October 23, something important happened. The US 10-year Treasury bond yield went up to more than 5%, which is the highest it is been since 2007. This means US bond yields have reached a level they haven’t seen in 16 years.
When the US 10-year bond yield goes up, it can make other investments like stocks, currencies, and goods around the world look less attractive. Many analysts believe that US Treasuries are the best option right now because they offer returns of about 5%, as reported by Moneycontrol.
Reason for Increase in American Bond Yields
US debt is at a record high, standing at $33.5 trillion, as reported by the Economic Times. The supply of bonds has gone up in recent quarters because the US government has been running high deficits. When the government borrows more money, investors want a higher premium for lending that money, which is why bond yields go up.
Additionally, there has been a sharp increase in oil and gasoline prices. In just three months, oil prices jumped from $70 a barrel to $97 a barrel. This increase in energy prices is one of the factors affecting the bond market.
At the same time, the US Federal Reserve’s gradual approach has created concerns that the Fed may raise rates one more time before a pause, but the minutes of the meeting state that inflation is there to stay.
There are also growing geopolitical concerns due to the Israel-Hamas crisis. Because of these factors, there will be less likely to be rate cuts.
What Will be the Impact on Indian Equities?
The increase in bond yields is not good news for Indian stocks. This is because when you consider the impact of currency changes, it makes emerging markets like India less attractive to investors.
As per Moneycontrol, because of this trend, foreign institutional investors have already sold Indian stocks worth Rs 13,412 crore this month. Many market experts are worried that if US bond yields keep going up, it could hurt Indian stocks even more, leading to more selling by foreign investors.
If we look at Indian stocks, both benchmark indexes, the Nifty 50 and the Sensex, have experienced significant drops for the sixth day in a row as of October 26, 2023. Nifty also closed below the 19,000 mark.
What Will be the Impact on India’s Debt Market?
While we can see many effects of rising bond yields in the global market, it seems that these global changes won’t have a big impact on the Indian debt market.
According to Moneycontrol, Deepak Aggarwal, who is the CIO of Fixed Income at Kotak AMC, believes that foreign portfolio investors (FPIs) have been making positive investments in the Indian debt market since March 2023. What’s even more significant is that India is expected to be included in the JPMorgan Emerging Markets Bond Index, which could bring in over $20 billion in fund flows to the Indian debt market next year. Because of these factors, experts aren’t too concerned about India’s debt market.
What’s Next?
According to a report from Mint, analysts suggest that the increase in US bond yields, combined with the increased risk of a broader conflict in the Middle East, is impacting emerging nations’ currencies and risky assets.
Considering that the US Treasury is offering a return of 5%, a continuous increase in US bond yields might lead to more money flowing out of global markets, particularly from emerging markets like India. This happens because investors are drawn to higher and safer returns.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.
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