Updated: February 23, 2021 12:29:59 am
THE RISE in bond yields across the world has disrupted the bull rally on the stock markets with the benchmark Sensex of the BSE plunging 1,145 points, or 2.25 per cent, to 49,744.32, taking the aggregate fall over the last five trading sessions to over 2,400 points, or 4.6 per cent. It closed at 52,154 on February 15.
The NSE Nifty Index plunged 306 points at 14,675.70 as rising Covid cases in states like Maharashtra and Kerala added to the bearish mood. While the Sensex slid below the 50,000 mark, the fall was not limited to Indian markets. The primary indices in leading European and Asian markets were also down Monday, as rising bond yields impacted global equity investment sentiments.
Mrinal Singh, CEO and CIO, InCred Asset Management, said: “Rise in commodity prices, crude and fear of inflation, which led to hardening of yields, have impacted the equity market sentiments. While we don’t know how yields may move over the next few days, the management of inflation is something that all central bankers and policy makers are aware of. I think the markets are waiting for the regulators’ response and their direction on bond yields.”
While the rise in bond yields in India is in response to factors such as absorption of additional borrowing by the government, expectation of better growth in the economy and slippage in fiscal deficit, experts feel they will not impact equity markets much at the current level. “But if the 10-year G-Sec yield crosses 6.25 per cent to 6.5 per cent, it may have an impact,” said a CIO-fixed income with a leading mutual fund.
On Monday, yield rose by seven basis points from Friday’s closing of 6.13 per cent to 6.20 per cent. Bond yields have an inverse relationship with equity returns. Rising yields hurt equity markets as investors move from equity to debt and the cost of capital rises for companies which compresses valuations of stocks.
While the rising bond yields globally have raised investor concerns and acted as a trigger for a fall in equity markets, experts feel that a fall in markets have led many investors, who are worried over expensive valuations, to go for profit booking, resulting in a further decline.
Shrikant Chouhan, Executive Vice President, Kotak Securities, said: “Markets fell more than two per cent led by weakness in financial stocks following a sudden rise in 10-year bond yields across the world. India’s 10-year bond, which was at 5.71 per cent, has started trading at 6.20 per cent. Bond yield in the US, which was at 0.31 per cent in the month of March 2020, is quoting at 1.38 per cent now.”
During the first half of the year, bond yields were mostly below 6 per cent on the back of effective yield management by the RBI. “However, all this changed after the Budget when the government upped its borrowing programme for the current fiscal and announced an aggressive one for FY22. With just over a month left in FY21, the market is still expecting a consolidated borrowing amount of more than Rs 2.5 lakh crore as per the auction calendar of the Centre and states,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.
Markets watch bankers
The rise in bond yields has impacted equity markets. But fund managers believe it is the direction of commodity prices and inflation that will chart the trajectory. For now, the markets are looking at the response of central bankers and for direction from them.
The average increase in government securities yields across three, five and 10 years is around 31 basis points since the Budget. Corporate bonds rated ‘AAA’ and SDL spreads have jumped by 25-41 basis points during this period.
Bond yields play a big role in FPI fund flow. Traditionally, when bond yields rise in the US, FPIs move out of emerging market equities. When the bond yield in India goes up, it usually results in capital outflows from equities into debt. Hence, a continued rise in yields in developed markets may put more pressure on Indian equity markets.
While the rise in Covid cases has emerged as a fresh concern for markets, some experts feel that equity investors should buy on dips. Stating that the rising economic restrictions from a spike in virus cases and weak global cues have also hit domestic market sentiment, Vinod Nair, Head of Research at Geojit Financial Services said: “This is a buy-on-dip market, a short-term correction will trigger new buying, as economic fundamentals have improved, with more focus on industrial and cyclical.
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