High global bond yields weigh on domestic stocks

Despite the turbulence, experts say this development is not a long-term risk and could benefit markets here

Surging bond yields in the developed world continued to keep Indian markets under check and led to a sharp increase in volatility on Thursday.

As yields on government paper in the US and Germany rose to their highest level in five months, the markets here ended with losses after attempting a sharp recovery a day earlier.

The BSE exchange's benchmark Sensex ended 45 points or 0.2 per cent lower at 27,206.06, clawing back from a 300-plus points fall after a recovery in banking shares, as softening inflation raised hope of an interest rate easing by the Reserve Bank of India. The India VIX index, a gauge for market volatility, rose for a third day in a row as investors bought more options as a shield against sharp swings.

The yield on the 10-year US Treasury and 10-year German Bunds were trading near a year’s high, raising worries among investors about liquidity in the financial world. Experts believe the Indian markets will continue to witness turbulence in the near term, as an increase in yields in the western world will stoke capital outflows from riskier markets like India's. They also say an increase in yields in the developed markets isn’t a worry for stocks here, as the two have historically moved in line.

Foreign investors on Thursday remained net sellers but the amount wasn’t alarming, provisional exchange data showed. Foreign institutional investors have been continuous sellers in all but one of the previous 15 trading sessions.

The yield on 10-year US bonds during this time has increased from a year’s low of 1.64 per cent to nearly 2.3 per cent. On the 10-year German bonds, it had moved from a low of 0.075 in April to 0.73 on Thursday.

U R Bhat, managing director, Dalton Capital, said the recent spike in yields might tempt some foreign funds to repatriate capital but liquidity would never completely dry out. “Quantitative easing programmes continue to remain in full swing in Europe and Japan. There is no reason why foreign flows should collapse, unless India suddenly doesn’t appear an attractive enough destination,” he said.

Other experts say although the surging yields could put pressure on the markets in the near term, Indian markets will eventually benefit from these. “Historically, the rise in bond yields in the western world has meant good news for emerging market equities and India equities. They typically show a direct correlation over a long-term period. As yields rise, money move out of bonds into other asset classes like equities. So, the concerns are overdone,” said Saurabh Mukherjea, head of institutional equities at Ambit.

Global brokerage UBS, in a recent note, said: “Our base case assumes global yields are unlikely to remain persistently low, which supports our current country allocation. We are underweight (on) Southeast Asia, Hong Kong and Singapore, which might prove vulnerable to higher rates…We continue to favour markets where policy could ease with limited risk to the currency — China, India and Japan.”