Chart of the Day: Rising yields may find it hard to yank locals from equities

Rising bond yields attract investors away from equities, a key concern currently as Indian equity indices rely on the support of domestic investors in the wake of incessant exits by foreign investors.

But, as the above chart indicates, the correlation between equity market outflows and debt inflows at higher bond yields is tenuous. In a deep dive on flows since 2000, analysts at BofA Securities found that at bond yield as high as nine percent and above, the ratio of equity outflows and debt inflows is below 30 percent.

In other words, only 23-29 percent of monthly instances of simultaneous equity outflows and inflows into bonds are found at that yield level. This is a relief for India’s equity markets in some ways.

Sure, rising bond yields may lure flows away from the stock market but the damage won’t be intense. BofA therefore sees domestic equity inflows sustaining comfortably, at least until the first quarter of calendar year 2023 on the assumption that the 10-year benchmark bond yield won’t exceed 7.6 percent.

The emerging concern among investors that domestic equity inflows could get impacted, therefore, may not be warranted.