Surging bond yields may stem Indian equities’ bull run

As the stock markets correct from record high levels, further decline may well be in the waiting with bond yields surging globally.

Analysts are of the view that global bond yields may go northwards till the end of 2021, which may lead to a descent in the equity market in the second half of the year.

US 10-year bond yields have risen from below 1-1.29 per cent, building on the prospective economic impact of the $1.9 trillion stimulus package. In India too, the 10-year bond yields have moved up from recent low of 5.76-6.13 per cent which could mainly be linked to the higher fiscal deficit estimates, they said.

Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities, said that the domestic 10-year bond yields to be in the range of 6-6.75 per cent in this calendar year. He added that in India, a lot will depend on the magnitude of the government’s borrowings and the Reserve Bank of India’s ability to articulate and execute a well-calibrated bond purchase programme.

“We expect global bond yields to gradually move higher from now till the end of the calendar year, which could impact emerging market currencies and lead to moderation in equity valuation. Till the time, it is gradual and not abrupt, markets can adjust to it. Considering the potential rise in bond yields, we are building in some kind of moderation and de-rating in Indian equities to take place in the second half of this calendar year,” he said.

Off late, both global and domestic indices have been on a downturn due to profit booking and rising yields.

Rising bond yields in the US makes investors in the stock markets of emerging economies like India to pull out their investments in equities and put in that money in the bonds which providing better yield.

A recent report by Kotak Institutional Equities noted that market returns will depend on interplay of potential earnings upgrades and bond yields increase.

“We expect muted returns from the market over the next few months as valuations are quite rich and possibly higher bond yields may offset potential earnings upgrades,” it said.

Both earnings and bond yields are likely to head higher through the course of the year, although the extent of increase will depend on the strength of economic recovery and the ability of the RBI to manage the ‘narrative’ for bond yields.

The report noted that it is unlikely that bond yields will go down from current levels.

“Low global and domestic bond yields are a key peg to the market’s rich valuations,” it said.

The domestic market already has been on a downslide for the last four sessions. On Friday, Sensex closed at 50,889.76, lower by 434.93 points, or 0.85 per cent, from its previous close of 51,324.69 points.

The Nifty50 on the National Stock Exchange closed at 14,981.75, lower by 137.20 points, or 0.91 per cent, from its previous close.