"Given the context of the GDP report and upcoming Fed meeting, the recent rise in US treasury yields could be a short-term adjustment by the market as it digests the implications for inflation and potential policy changes," Sonam Srivastava, Founder and Fund Manager at Wright Research, says in an interview to Moneycontrol.
She further says whether this becomes a sustained rise based on how the economic data and Fed actions unfold.
If inflation remains a concern and the Fed maintains a hawkish stance, yields might continue an upward trend, says Sonam, who has more than 10 years of experience in quantitative research and portfolio management.
The 10 year US Treasury yields increased to 4.7 percent on April 25, from 4.6 percent on April 23.
Edited excerpts:
Why are the bond yields rising after the US GDP figures?
The recent rise in US Treasury yields after the GDP figures can be attributed to a confluence of factors. While the headline GDP growth figure of 1.6 percent for Q1-2024 (advance estimates) might suggest a slowing economy, the accompanying data point on inflation paints a contrasting picture. Consumer prices rose at a concerning rate of 3.4 percent, significantly higher than the previous quarter. This unexpected juxtaposition of slowing growth alongside persistent inflation has rattled investor confidence.
The market interprets this as a potential for stagflation, a scenario where economic growth stagnates while inflation remains high. This raises concerns about the Federal Reserve's ability to fulfill its dual mandate of promoting economic growth and maintaining price stability. If inflation remains stubbornly high despite a sluggish economy, the Fed might be less inclined to cut interest rates as previously anticipated.
In anticipation of a potentially tighter monetary policy stance to combat inflation, investors are seeking the relative safety of bonds, pushing treasury yields higher.
Have the yields risen significantly? Or Is it just a short term spike till the market adjusts?
Given the context of the GDP report and upcoming Fed meeting, this rise could be a short-term adjustment by the market as it digests the implications for inflation and potential policy changes.
Whether this becomes a sustained rise depends on how the economic data and Fed actions unfold. If inflation remains a concern and the Fed maintains a hawkish stance, yields might continue an upward trend.
What does this mean for equity markets globally and for Indian equity markets?
The rise in US Treasury yields presents a complex scenario for global equity markets, with India being no exception. Higher yields can entice investors towards the relative safety of bonds, potentially putting downward pressure on stock prices.
Developed markets with close ties to the US might experience similar pressures as investors shift focus.
For India, the impact might be mitigated if domestic growth drivers remain robust and inflation is effectively managed. However, India's reliance on foreign investment makes it more vulnerable to global risk aversion triggered by rising US yields. Ultimately, the health of the Indian economy and its ability to control inflation will be crucial in determining the ultimate impact on its equity markets.
Does the rising US bond yields hint at stagflation?
The recent economic data presents a cautionary signal, hinting at a potential stagflationary environment. The lower-than-expected GDP growth of 1.6 percent coupled with a concerning rise in consumer prices (3.4 percent) mirrors classic stagflationary conditions – sluggish economic activity coinciding with persistent inflation. However, a definitive conclusion is premature.
The unemployment data, another crucial indicator of stagflation, is not yet at alarming levels. The bond market's reaction, with rising yields, reflects some investor apprehension about the possibility of stagflation.
The Federal Reserve's upcoming policy meeting will be a key event to watch. Their stance on inflation and potential interest rate adjustments will influence market expectations and significantly impact the likelihood of stagflation becoming a reality.
Ultimately, the trajectory of inflation data and the Fed's actions will be crucial in determining if these initial signs morph into a full-blown stagflationary scenario.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
