US, India bond yields on a rise; what does it mean for you?

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A spike in domestic and global bond yields has rattled investors. Benchmark equity index BSE Sensex tanked more than 1,700 points or 3.40%, to 49,305 as market participants preferred to book profits due to rise in bond yields. Likewise, NSE Nifty traded 500 points down at 14,596 at around 1 pm (IST).

Earlier, the US stocks dropped sharply on February 25 as an outsized surge in bond yields spooked investors, who rushed to dump equities, especially high-flying technology names. The 10-year Treasury yield soared as high as 1.6% in a sudden move that some described as a “flash” spike. The yield later settled back down to around 1.52%, its highest level since February 2020. In India, 10-year bond yields have also spiked to 6.23% from 5.95% during the past one month.

A bond is a loan to government or a company that pays investors a fixed rate of return over a specific timeframe. On the other hand, bond yield is the return people receives on that bond.

So, why should you be worried about high bond yields?

Volatility in bond markets across the world result in high yields. In such a scenario, bond markets are worried about inflation, because of stimulus packages that governments and central banks world over have announced. According to Angel Broking, a sustained surge in yields will impact the stock markets. Rising bond yields tend to negatively affect equity valuations.

A rise in inflation will push the US Federal Reserve to either lower monthly bond-buying or hike interest rates.

It would mean a negative development for emerging countries. India has been a major beneficiary of overseas inflows in the recent past.

“Rising yields have created fear in the US that there could be a repeat of the famed ‘taper tantrum’ when the Federal Reserve decided to wind down its bond-buying programme,” said Angel Broking.

Going ahead, bond yields will be key monitorable for investors as it would lead to rise in volatility. Therefore, ICICIdirect believes that Nifty sustaining above the psychological mark of 15,000 (on a closing basis) would keep positive momentum intact.