Rising 10-year US treasury note, a cause of worry

On Friday last, the market fell badly and the rise in the US 10Y bond yield was to blame for that mayhem. The increase in yield on US 10-year bond to 1.6 per cent, the highest ever in past one year, has got several aspects attached to it. However, $1.91 trillion pandemic relief package announcement by Biden saw drop in the yield to 1.4 afterwards.

Significantly, Indian 10-year benchmark yield has also risen from Covid-19 low of around 5.70 per cent (May 2020) to around 6.20 per cent now.

However, it can be seen in two different frames, when it comes to the Indian context. First: There are early signals of sharp rise in inflation in the near terms. Increase in interest rate is a known monetary policy tool to curb inflation. It means that the RBI will have to shed its ongoing accommodative monetary stance and start taking the key policy rates northward. If it so happens, home loans will get costlier as the lenders will join the race of increasing interest rates on advances.

Of course, this situation had already been warranted by an ever-increasing oil price. Vegetables may be available at an affordable price and that too in plenty because of favourable climate, but the problem was that it has to be transported which will get costlier now. To enunciate it, minimum taxi and rickshaw fare have gone up since Monday.

Second important aspect is change in behaviour of retail investors. For them, investing in equity will go to backburner and bonds will look more attractive to place their hard-earned money into. Moreover, FIIs, that have been driving the growth of the stock market to a historic level, are also feared to change their tack and take their money from Indian bourses back to their own countries, leaving India in a lurch. Third: Bonds may regain their sheen. Not to mention, the bond yield is inversely proportional to bond price.

In 2020, the market rose because of huge liquidity and low interest rates. And now bond's yield has started rising which indicates that the interest rates are set to harden in the coming months. And when a fixed financial instrument (like bond) starts giving a good fixed return, then money will start shifting from equity to bonds. Time for investors to migrate from 'risk' (equity) to 'fixed but stable reward' (bond).