BackBond yields spike amid bets of interest rates staying higher for longer; how will it impact Indian stock markets?
The benchmark US 10-year bond yield scaled fresh 16-year highs. The yield on the 10-year note was hovering around 4.85% in Asian hours, its highest level since August 2007. The 30-year yields touched 5% for the first time since 2007.
PremiumThe Indian stock market indices, Sensex and Nifty 50, dropped nearly a percent on Wednesday tracking weak global cues amid surging US Treasury yields and a spike in dollar.
The ongoing rout in global bond markets saw US bond yields reach 16-year highs, souring appetite for risk assets on bets that interest rates will remain persistently high.
The benchmark US 10-year bond yield scaled fresh 16-year highs. The yield on the 10-year note was hovering around 4.85% in Asian hours, its highest level since August 2007. The 30-year yields touched 5% for the first time since 2007.
The spike in Treasury yields lifted the dollar to new heights. The dollar index, which tracks the greenback against six peers, hit a nearly 11-month high of 107.34 in the previous session. On Wednesday, the dollar eased 0.12% to 106.94.
On the domestic front, the Indian government bond yields continued to rise, with the benchmark bond yield reaching levels last seen nearly six months ago.
The 10-year benchmark bond yield was around 7.2442% after hitting 7.2612%, its highest since April 18, earlier in the session. The bond closed the previous session at 7.2327%.
Why are bond yields rising
Strong economic data in the US and hawkish comments from the US Federal Reserve officials have raised bets that the interest rates will remain higher for longer, leading to a spike in bond yields.
US job openings unexpectedly rose in August, pointing to tight labor market conditions that could compel the Federal Reserve to raise interest rates next month, with the odds rising above 30%, Reuters reported.
According to the Labor Department’s monthly Job Openings and Labor Turnover Survey, or JOLTS report, job openings jumped 690,000 to 9.610 million on the last day of August.
Additionally, US Federal Reserve officials say that monetary policy will need to stay restrictive for “some time" to bring inflation back down to the Fed’s 2% target.
“I remain willing to support raising the federal funds rate at a future meeting if the incoming data indicates that progress on inflation has stalled or is too slow to bring inflation to 2% in a timely way," Fed Governor Michelle Bowman said Monday.
Cleveland Fed leader Loretta Mester also said the Fed’s work is likely not done.
“I suspect we may well need to raise the fed funds rate once more this year and then hold it there for some time as we accumulate more information on economic developments and assess the effects of the tightening in financial conditions that has already occurred," Mester said in a speech to a group in Cleveland.
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Impact on Indian stock market
Rising bond yields have spooked the stock markets as investors tend to shift away from risky assets. The surge in US treasury yields negatively impact the capital flows into emerging markets, such as India.
The foreign institutional investors (FIIs) have been offloading Indian equities as rising bond yields and the dollar acted as catalysts for the selloff.
Also Read: Nifty 50, Sensex drop almost by a percent each: Five key reasons for the market fall - explained
The foreign investors sold Indian equities worth ₹14,768 crore in September and ₹2,868 crore in October so far, as per data available on NSDL.
“The sustained rise in the US bond yields, which has triggered continuous FII selling, is showing no signs of abating. The dollar index is now clearly above 107 and the US 10-year bond yield is at 4.83 per cent. This means FIIs will continue to sell and the bulls will be on the back foot," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Impact on gold prices
The sustained selloff in the US treasuries has also weighed heavily on international gold prices.
Spot gold eased 0.2% to $1,819 per ounce, while US gold futures dropped 0.3% to $1,835.50. Gold prices fell for a seventh consecutive session on Tuesday to touch their lowest level since March at $1,813.90, Reuters reported.
Read here: Gold, silver rate today under pressure as US dollar continues to gain strength
On the domestic front, gold prices have fallen nearly 3% in the month of September. On Wednesday, MCX gold was trading around 0.13% lower at ₹56,854 per 10 grams.
Expectations from RBI
The three-day meeting of the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) began on Wednesday and its outcome is due on Friday. The RBI policy meeting comes amid the environment of selloff in bond markets, spike in yields, FII selling, rupee hovering near all-time low and rising crude oil prices raising concerns over high inflation.
However, most economists expect the central bank to maintain the status quo on policy rates but maintain its hawkish policy stance.
Read here: RBI likely to maintain status quo on policy rates as inflation still high: Experts
“With growth remaining steady, the RBI will prefer to stay watchful of the risks from the external sector and inflation. The MPC will keep the repo rate at 6.5 per cent with the stance retained at the withdrawal of accommodation. The RBI will aim to keep external risks at bay by acting on liquidity and forex and bond market interventions," Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities, wrote for Mint.
(With inputs from Reuters)
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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