US BOND YIELDS from Vajirao & Reddy Institute

US BOND YIELDS

• Recently, US Treasury yields climbed to a 16-year high, as a global bond rout resumed following a brief reprieve at the end of last week.

• The multi­ decade ­long bond bull market which peaked in 2020, has now reversed.
• The US 30 ­year bond which had a yield of around 9 per cent in 1988, had dipped to below 1 per cent in 2020.
• In this period the risk­ free 30­ year bond index had outperformed the stock market benchmark, S&P 500 total return index.
• With the 30­ year bond now yielding 4.96 per cent, it is now at levels last seen in 2007.
• So is the 10­ year bond which is yielding 4.79 per cent.

• The main three factors are:

1. Persistent inflation
2.  avalanche of bond issuance
3. Global macro/geopolitical factors

• When it comes to persistent inflation, there are two drivers pushing yields up.
• Investors now believe the US is likely to have long ­term inflation around 3 percent.
• For holding bonds they want compensation for that inflation and a premium over that.
• Typically investors in 10­ year yields may expect at least a 1.5 per cent premium over inflation.
• The other driver is the concern that the Fed’s pause on rate hikes may be premature.
• Add to it the fact that the US Treasury drained out its Treasury General Account when the debt ceiling deadlock prevented it from raising funds.

• FPI selling in equities has been happening since the time US bond yields shot up post the Fed meet in September.
• Indian equity markets while have corrected from peak, have still fared relatively better than global peers.
• Domestic buying has cushioned our markets from steeper fall.