Whenever the bond yield increases investors including FII prefer to withdraw from equities and look at investing in bonds.
March 01, 2021 / 02:45 PM IST
The yield on 10-year bonds in India recently climbed to 6.20 percent after almost a year of low interest. One big leg of support for the equity market is a low-interest regime. Not that the low-interest rate scenario is about to change but, if the rate continues to go up, the support for equity markets will get weaker.
The rise in bond yields raises the cost of capital for companies, which, in turn, affects their stock valuations. Hence, stock markets across the world are seeing some impact of increasing bond yields.
If central banks allow the yields to go up, it indicates that the liquidity support that has been offered may also go down. Given that the government has such a high level of borrowing at low interest rate, it is easy to do but when the rate goes up, even fiscal deficit and government spending will come under pressure.
The increase in yield was expected as the rates were low for a long time and some amount of normalisation of was due. This should also be looked as a sign of economic recovery at a better-than-expected pace. So, some amount of increase in the interest rate and overall liquidity will happen.
Also read: Rise in US bond yields not a surprise, stay cautious: Keval Bhanushali of Marwadi Shares and Finance
Even the Federal Reserve rates were expected to go up for a long time but due to the COVID-19 pandemic, they weren’t raised. A gradual withdrawal of stimulus across the world and increase in US Fed rates could result in money moving back, as investors would like to invest in the US Treasury bonds or their own country, which is considered safer compared to equity investments in emerging markets like India. Hence, we saw FII outflows in the last couple of days.
Also, whenever the bond yield increases, investors including FII, prefer to withdraw from equities and look at bonds. This was expected and it also indicates that the pace of recovery across the world is improving and is moving in the right direction.
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