Rising bond yields could continue to threaten commodity market: Ravindra Rao of Kotak Securities

Most commodities continued their upward momentum this week, however, the pace has become rocky owing to challenges in form of rising bond yields. The lack of any major new development and mixed trade in the US dollar has also made commodities more susceptible to volatility in bonds and equity markets.

Crude oil surged to January 2020 highs earlier this week but has eased back while copper has also corrected after testing August 2011 highs. Gold, which is directly impacted by yields, has slumped to June 2020 lows. Similarly, the US DJIA index surged to a record high level but has corrected in the last two sessions.

US bond yields have risen sharply and this has reflected in global bond markets as well. The US 10-year bond yield has surged to a fresh January 2020 high of near 1.61 percent. Japan's 10-year yield rose to 0.135 percent, their highest since November 2018. German 10-year yields rose to the highest level since March.

Higher yields reflect increasing optimism about global economic recovery as fresh virus cases slow down. However, higher yields also reflect increased inflation and interest rate hike expectations.

The rally seen in equities and commodities in the last few months has largely been driven by huge monetary inflow by major central banks. The rally is now challenged by inflationary concerns as well as fear of higher borrowing costs which can impact profitability.

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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Bond yields have continued to rise even as central banks have maintained that accommodative monetary policy may remain in place. Federal Reserve Chair Jerome Powell said on Wednesday that US rates could remain low for years, while ECB board member Isabel Schnabel on Thursday said it would fight any big increases in inflation-adjusted market rates.

The incessant rise seen in bond yields has led to volatile trade across financial markets and the question is whether it will continue. Rise in yields despite central bank commitment indicates that market players are looking past the current situation and focusing on post-COVID-19 economic recovery. While the global situation is improving, virus concerns are far from over while economic data also points to uneven recovery with high unemployment rate a major concern in the US and globally. Unless market expectations of quick economic recovery materialize and become evident from economic indicators, the rise in yields could be challenged.

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