On Friday, we saw something that rarely happens. A mature market like the US markets saw the Dow Jones plunging 666 points in a single trading day. It is extremely rare to see such a sharp fall on the Dow.
It was a terrible week for the Indian markets as well with the Sensex seeing the seventh highest fall in a single trading day, when it plunged 840 points. While one of the reasons for the fall was the Long Term Capital Gains, investors are also worried of rising bond yields in India and a huge sell-off in bonds. The 10-year bond yield in India jumped to 7.6 per cent, something that we have not seen in the last 22 months.
Markets are bracing for more as bond yields across the globe rise. In fact, this is happening both in the US and in India.
What does this have to do with the stock markets? The answer is simple, when debt yields start rising individuals sell stocks and park money in debt, especially if returns improve significantly. We have the Sensex at a staggering 35,000 points and the Sensex trailing p/e at near 25 times, which is significantly higher than the average of 17 times seen in the past.
Thus it makes sense for investors to sell stocks that are highly valued and park money in debt, when yields are rising. A further rout in global markets is possible, if yields keep jumping.