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How bond market impacts equity market?


How bond market impacts equity market?
Like other macro and micro-factors including economic fundamentals, oil prices that have a bearing on the stock market of a country, performance of bond market also casts its impact on the equity market. Bond market that is extensively influenced by the interest rates in the economy performs well in the rising interest rate scenario in the economy. This is because when interest rates witness an uptrend in the economy, price of bond falls in the market and hence the yield or return on them increase. In line, new bonds issued in the market bear a higher coupon rate.

And now bonds owing to their high performance as well as safety attract more funds as bonds quote at a lower price which then propels a sell-off in the equities market. Consequently, stock market of an economy under-performs. And in the reverse case when interest rates decline, bond quote at a higher price and yield lower returns. So, citing better gains in the equity market, investors deploy their investible surplus in equities market which witnessing a surge in funds in the market sees an increase in stock prices.

Yields on 10 year G-securities- How does it impact borrowers and investors?

In India, yield on G-securities with ten year maturity is considered to be the benchmark for determining interest rate in the economy. Yield on government securities taken to be risk free return rate for gilts or government securities is taken as the basis on which banks as well as different other lending institution base their lending rates. Any increase in 10-year G-securities for over a couple of days leads the lenders to drag the interest rate higher and vice-versa. So, increase in 10-year G-securities yield impacts borrowers negatively as they are able to finance their borrowings at a higher rate of interest. At the same time, rate of interest on deposits is increased by banks thus making the scenario fare well for investors in term deposits.


How do they effect equity markets?

When bond yields rise, risk averse investors might want to move part of their holdings from equities to bonds, due to higher yields. This tends to put some pressure on equity prices. Rising bond yields thus always pose a threat to equities.

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