US BOND YIELDS
WHY IN NEWS ?
- Recently, US Treasury yields climbed to a 16-year high, as a global bond rout resumed following a brief reprieve at the end of last week.
MORE ABOUT THE NEWS :
- The multi decade long bond bull market which peaked in 2020, has now reversed.
- The US 30 year bond which had a yield of around 9 per cent in 1988, had dipped to below 1 per cent in 2020.
- In this period the risk free 30 year bond index had outperformed the stock market benchmark, S&P 500 total return index.
- With the 30 year bond now yielding 4.96 per cent, it is now at levels last seen in 2007.
- So is the 10 year bond which is yielding 4.79 per cent.
WHAT IS CAUSING THE INCREASE IN YIELDS ?
- The main three factors are:
- Persistent inflation
- avalanche of bond issuance
- Global macro/geopolitical factors
- When it comes to persistent inflation, there are two drivers pushing yields up.
- Investors now believe the US is likely to have long term inflation around 3 percent.
- For holding bonds they want compensation for that inflation and a premium over that.
- Typically investors in 10 year yields may expect at least a 1.5 per cent premium over inflation.
- The other driver is the concern that the Fed’s pause on rate hikes may be premature.
- Add to it the fact that the US Treasury drained out its Treasury General Account when the debt ceiling deadlock prevented it from raising funds.
IS INDIAN EQUITY MARKET IMPACTED BY THIS?
- FPI selling in equities has been happening since the time US bond yields shot up post the Fed meet in September.
- Indian equity markets while have corrected from peak, have still fared relatively better than global peers.
- Domestic buying has cushioned our markets from steeper fall.
SYLLABUS: PRELIMS, CURRENT AFFAIRS
