Rise in bond yield

Rise in bond yield

Subject: Economy

Context: Rising yields on government securities or bonds in the United States and India have triggered concern over the negative impact on other asset classes, especially stock markets, and even gold.

Concept:

• Bond yield is the return an investor gets on that bond or on a particular government security.
• The major factors affecting the yield is the monetary policy of the Reserve Bank of India, especially the course of interest rates, the fiscal position of the government and its borrowing programme, global markets, economy, and inflation.
• A fall in interest rates makes bond prices rise, and bond yields fall and vice-versa.
• Bond yields are inversely proportional to equity returns: when bond yields decline, equity markets tend to outperform, and when yields rise, equity market returns tend to falter
• Thus, when bond yields go up, investors start reallocating investments away from equities and into bonds, as they are much safer. As bond yields rise, the opportunity cost of investing in equities goes up, and equities become less attractive.
• Also, a rise in bond yields raises the cost of capital for companies, which in turn compresses the valuations of their stocks
• Impact on Foreign Portfolio Investment (FPI): Traditionally, when bond yields rise in the US, FPIs move out of Indian equities. Also, it has been seen that when the bond yield in India goes up, it results in capital outflows from equities and into debt.