US bond yields climb as strong economy fuels Fed rate risk; hit Indian rupee, share market

The impact of rising US bond yields and a stronger dollar is rippling across India and other global emerging markets.

US bond yields are climbing sharply, with the benchmark 10-year Treasury yield nearing 5 percent, as robust economic data strengthens expectations of prolonged high interest rates by the Federal Reserve. While US government bonds are typically considered safe assets, their prices are under pressure, facing risks from the prospect of higher rates, which reduce the appeal of existing bonds.

The impact of rising US bond yields and a stronger dollar is rippling across India and other global emerging markets. On Monday, the Indian rupee tumbled to a record low of 86.5963 per dollar, falling 0.7 percent in its steepest drop since early 2023. This decline coincided with a 1.5 percent fall in the NSE Nifty 50 index and a seven-basis-point rise in India’s 10-year bond yield to 6.85 percent. Higher oil prices and a firm dollar added to the strain, tightening financial conditions.

Stronger US economy delays rate-cut hopes

Friday’s US nonfarm payrolls report showed employers added 256,000 jobs in December, far exceeding economists’ expectations. The unemployment rate fell further, underscoring the strength of the US labour market. Reuters reported that this has dashed hopes for near-term rate cuts, with traders now expecting the Federal Reserve to hold interest rates steady until at least June, compared to earlier bets on cuts as soon as May.

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The surge in US bond yields reflects a shift in investor sentiment, with longer-dated Treasury yields rising sharply. The 10-year yield, which moves inversely to bond prices, rose to 4.79 percent, the highest since November 2023. Analysts at Bank of America Securities said the risks of another Fed rate hike, rather than a cut, have increased as inflationary concerns persist.

Gold and crude oil gain amid global uncertainty

The strong US economy and geopolitical risks have also boosted demand for safe-haven assets like gold. Gold prices rallied for a fourth consecutive day, trading near a one-month high of $2,690 per ounce, according to Bloomberg. Chris Weston, head of research at Pepperstone Group, said that investors have shifted away from riskier assets in favour of gold and the dollar amidst uncertainty over the Fed’s policy path.

Crude oil prices surged to a four-month high on Monday after the US imposed its toughest sanctions yet on Russia's energy industry. The sanctions have raised concerns about tighter global supplies. For oil-importing nations like India, the rally has compounded pressures on the rupee and other financial assets.

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Dollar strength amplifies global financial strain

The robust US labour market data has driven the US dollar to near a two-year peak. Goldman Sachs has projected a 5 percent rally in the dollar over the coming year, citing US economic resilience and potential new tariffs. The rising dollar has intensified pressure on emerging market currencies. In India, the rupee’s record low exacerbates challenges for stocks and bonds, while higher oil prices amplify economic headwinds.

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