Blog

Global Bond Yields Surge:

• The global bond yields have been increasing recently due to strong macroeconomic data supporting the continuation of a monetary tightening policy through interest rate hikes.
• In the US, the 10-year Treasury yields have reached levels around 4.366%, the highest since 2007. This has prompted investors to adopt a risk-off approach.
• The US Federal Reserve has been hiking interest rates to combat soaring inflation, with the latest increase pushing the benchmark interest rate into the 5.25%-5.50% range, marking its 11th hike in the last 12 meetings.
• Strong US economic data, including a 0.7% rise in retail sales in July and a 2.4% annualized GDP growth rate in the second quarter, has reduced expectations of easing interest rates, contributing to the possibility of further rate hikes.

Impact on Markets:

• Rising bond yields have negatively affected the equity markets as investors tend to move away from riskier assets.
• The spike in US bond yields has also impacted capital flows to emerging markets like India.
• In India, the Nifty has fallen 1.45% in the last month, influenced by consistent selling by foreign institutional investors (FIIs) who have sold Indian equities worth more than ₹13,000 crore in August.

Indian Bond Yields:

• Indian government bond yields have been following the trend of increasing US yields, although the magnitude of the increase in Indian yields has been relatively small compared to the US.
• The spread between Indian and US government bonds has fallen to its lowest level in 14 years, indicating that local yields in India have not reacted as strongly to the increase in US yields.
• Despite the Reserve Bank of India (RBI) keeping the repo rate unchanged at 6.5%, the central bank has raised it by 250 basis points (bps) since May 2022.
• With domestic retail inflation at a 15-month high of 7.44% in July, it’s expected that the RBI will not cut interest rates soon, resulting in high interest rates prevailing in India.

Future Outlook:

• The future trajectory of bond yields and the equity markets may depend on trends in US inflation and the Fed’s monetary policy stance.
• Clarity on these macro trends will influence the direction of foreign institutional investments (FIIs) in India.
• Long-term investors are advised to consider accumulating high-quality growth stocks, particularly in sectors like large-cap banks and capital goods, which are seen as having bright prospects.

In summary, the global bond market is experiencing a significant shift with rising yields, and this is having a notable impact on both the US and Indian markets. Investors are closely watching the actions of central banks and economic data to make informed decisions in this changing landscape.