We may be over-worrying about rising treasury yields, here's why
The nominal 10-Year US Treasury yield has increased by 26 bps, it has gone from 1.28 percent to 1.54 percent or so and the real 10-year treasury yield has jumped by 20 bps - this has gone from -1.05 percent to -0.85 percent or so. The move in nominal yields is driven almost entirely by real yields.
Asian shares lost ground Wednesday as they tracked negative cues from Wall Street. Investors across the continents are fretting over economic uncertainties that caused a spike in the US benchmark bond yields and pushed the dollar to a more than 10-month high.
Doubts are re-emerging over the global recovery at a time when the US Federal Reserve is set to taper stimulus. And the Biden Administration is stuck in contentious debt ceiling negotiations that could lead to a government shutdown.
Benchmark 10-year rates have gained 25 basis points (bps) in five sessions and were last at 1.55 percent, having hit their highest since mid-June the day before, while the dollar index was at 93.752.
So the blame for the current bout of equity market weakness is being put on the fixed income market, namely higher market interest rates. US yields have jumped. Higher yields did not matter earlier so why now? What has changed really?
Do higher yields matter now?
Experts say not so much. “We are probably overreacting, what is happening in the US bond market right now,” Rohit Srivastava, Founder & Strategist of Indiacharts.com said.
In the US bond market, nominal 10-year US Treasury yield rose by 26 bps. It has gone from 1.28 percent to 1.54 percent. The real 10-year treasury yield has also jumped 20 bps -- from -1.05 percent to -0.85 percent or so. The move in nominal yields is driven almost entirely by real yields.
We have to keep in mind the risk-parity trade, which is a lot of funds move from either equity to bonds or bonds to equities. And sometimes it is just a reflection of that, he said.
"So as asset allocation towards the equity side increases you find that bond prices go down and yields start rising. So this is partly why we have seen in the past that yields and markets rose simultaneously,” he added.
Rising bond yields, according to Srivastava, are adjusting to reality, because “you cannot have higher prices and inflation elevated growth even if it peaks off from peak numbers and not have interest rates advance a little.”
“But be ahead of it,” he said, “what you will then end up watching is real interest rates.” Interest rates are keeping pace with the level of inflation, still, they are negative and they may go up and down a bit, so we are over worrying about this idea of rising yields, he said.
For the full interview, watch the accompanying video.
(Text inputs from Reuters)
(Edited by : Yashi Gupta)
First Published: Sept 29, 2021 5:18 PM IST
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