Trump tantrum not demonetisation could be cause of market worry

MUMBAI: How does the US 10 year bond yield affect Nifty? Emerging markets (EMs) have an inverse relation with bond yields in the US. Experts say, most funds have pegged their money flow into EM equity with 10 year US bond yield, a medium term gauge of dollar liquidity. Swift rise in 10-year yield thus causes funds to reverse positions in bond market.

FIIs pulled out close to Rs 6000 crore from stock market in India since Donald Trump’s election victory on November 9, which pushed the US bond yields higher. Key stock indices Nifty and Sensex fell close to 5 per cent. Fund managers say, a sudden rise in US 10-year bond yield has hurt stocks more than the government’s de-monetisation plan.



Inverse relation between Nifty and yield

“The 10 year US bond yield spike is essentially a giant vacuum cleaner that will suck cash out of the EM carry trade back to the US,” said Gautam Bahal, CEO, Mauryan Capital, Alternate Investment Fund. “If yields continue to move up dramatically, it could be a problem for India. They seem to be settling down a bit for now. Slow and steady yield rise may not worry investors.”

The ‘Taper Tantrum’ in 2013 saw 10-year US bond sell-off by 79 bps, compared to 65 bps post-Trump’s election victory. In 2013, Nifty and Sensex fell by close to 9 per cent from their highs within a few weeks. However, since India is currently perceived among the best EMs, the impact of bond yield spike is not as bad.

“Rising global bond yields are putting pressure on price to earnings (PE) multiple in India,” a Credit Suisse report said. “PE multiples rose steadily across sectors in India for last five years aided by steady decline in bond yields, easy monetary policy in developed markets. With yields now rising, exacerbated by the Trump victory, sectors that saw the strongest re-rating could come under stress.”