As we write, the yield on the 10-year government bonds has surged to three-year high, after the Central Statistics Office (CSO) reported a more than expected rise in inflation data on Monday.
The consumer price inflation or CPI surged 4.58 per cent in April, from 4.28 per cent in March. The Consumer Food Price Index, however, was a tad lower at 2.8 per cent in April, from 2.81 per cent in March.
This was one reason bonds yields surged as investors remained worried that inflation in the economy was creeping. This now left bond traders worried that we could see the Reserve Bank of India, also hiking interest rates.
This is good news for investors, who have been forced to park money in equities, as returns from debt have been very low.
Why a move from equity to debt would be a good idea?
Equity markets are likely to be extremely volatile in the next one year, with several state elections slated in in 2018 and 2019. With crude oil prices rallying a great deal, we are likely to see a further upmove of CPI inflation and a further rise in interest rates.
Another point worth mentioning is that equity markets have rallied significantly since the Union Budget 2018. In fact, the markets are barely 3 per centage points away from a lifetime peak. With a trailing p/e of almost 24 times, the markets are extremely expensive. In fact, they are way above the long-term average of 17 times. Interestingly, unless there is sharp recovery in earnings, a p/e expansion like this cannot be justified. Also, with interest rates rising, we are likely to see investors moving away from hefty equity valuations to debt.