Higher Yield Is Weighing On Different Asset Classes: Let's Understand The Imapct

For two consecutive days we saw Indian indices gain tremendously led by banking and metal pack and now after the US market in overnight trade saw a huge slump of over 3.5 percent on the NASDAQ, there is bound to be profit taking in India.

In the US , 10-year treasury yield has risen to 1-year high of 1.6 and now let's understand the impact:

Higher Yield Is Weighing On Different Asset Classes: Let's Understand The Imapct

Equities: Equities share a negative relation with bond yields i.e. in case of rising bond yield there is a drag on the equity markets and if the yields go down equities outperform by a strong margin.

And in such a situation, when bond yields move higher there is a shift in investors' funds to the former as they are considered highly safe.

In the US the rise in treasury yield to such levels also means a higher return in comparison to S&P 500's dividend yield. And this is important as treasuries are considered risk-free rate, implying equities have lost their premium over bonds.

Now, simply we can define the current trend by saying that in a rising yield scenario, equities shall be able to attract investors only when they are able to reap a higher return than bond yield. Further there is a risk element attached with equities and so a premium on equity investment, so below this return say the return on bond plus the premium, it will not make sense for the investor to consider investment in equities.

Gold: Gold has been highly volatile of late and in today's session has also been weighed down by higher yield and seen a fall by 2 percent to again below $1800 per ounce. On the MCX, gold traded at Rs. 46362 per 10 gm.

Now as US treasury yield as well as yields in the Indian markets have climbed to 6.18% and economy is on the recovery path, there is a drag in the safe haven appeal of gold and hence its price is inching lower.

Gold historically does not react well to rise in nominal and real yields And now, gold will trade sideways as risk-off sentiment has waned.

Mutual funds:

In India too, as government has upped its borrowing programme for the fiscal year 2022, the borrowing shall be made via bonds and hence there is an ample supply of bonds and hence their price have trended lower and yields gone up.

So, for mutual funds also the NAV has trended lower and hence it can be an opportune time for investor to bet on the debt funds which may provide good enough returns.

GoodReturns.in