The US 10-year Treasury yields are near their 16-year high level boosted by the prospects of another rate hike. Federal Reserve Chairman Jerome Powell on Thursday said that more interest rate hikes may be required to bring inflation down to a 2 per cent target because of a tight labour market and resilient US economy.
As Mint reported, Federal Reserve Chair Jerome Powell said on Thursday, October 19, that inflation in the US remains too high and bringing it down to the Fed’s 2 per cent target level will likely require a slower-growing economy and job market.
US bond yields have gone up significantly, nearing the highest levels in 16 years. The prime reason for this is the uncertainty about future interest rates in the US. A few weeks ago, everyone thought that there would be only one more rate hike. However, experts point out that Fed Chairman Powell on Thursday surprised everyone by suggesting that there might be more rate hikes in the future due to the strong economy and tight job market.
Experts observed that just when markets were assuming that rates were high enough, this view from the Chief renewed the nervousness and brought US 10-year yields near the 5 per cent mark. These levels were last seen in the year 2007.
On Friday, US 10-year bond yields declined over a per cent and hovered near 4.94 per cent.
Why are US bond yields rising?
Bond yields are influenced by the Federal Reserve’s interest rates. Experts say bond yields have been rising because of the current trend of higher interest rates. This can also be seen as an indirect signal of rising inflation and the anticipation of a potential economic slowdown, which in turn makes the cost of borrowing money higher.
Apart from this, increased bond supply and and macro as well as geopolitical uncertainty have also contributed to the rise in bond yields.
“The recent surge in nominal long-end yields has been led by: (1) increased supply in recent quarters, (2) higher real yields (which rose as markets faded recession risks) contributing more than inflation expectations (which have trended down amid negative inflation surprises in recent months), and (3) Fed repricing and soft landing narrative leading to higher term premia,” observed Madhavi Arora, Lead Economist at Emkay Global Financial Services.
Also Read: Mysterious rise in US Treasury yields perturbs markets
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How can high US bond yields impact the Indian stock market?
When US bond yields rise, foreign portfolio investors (FPIs) often divest from emerging market equities and allocate their investments towards US bonds. This shift is driven by the perception that bonds are less risky than equities and offer more attractive return potential.
Kaushik Dani, Fund Manager – PMS, Abans Investment Managers also believes higher bond yields are negative for the stocks.
He pointed out that high bond yields make elevated equity markets less attractive and risk-averse investors are the first ones to change the asset allocation. The risk-off strategy leads foreign investors to pull out money from emerging markets like India. This is because dollar returns for FPIs are better in US Treasury versus equities during that period.
Dani said not only foreign investors but even domestic institutions with hybrid objectives tend to shift funds from equity to debt. Overall, outflows from equities will keep the stock market under selling pressure, especially when…
Read More: US 10-year bond yields near 16-year high. How can it impact Indian stock market?