The global risk-off sentiment is high after the US 10-year yield clocked its biggest 1-day move in nearly 18 months and skyrocketed to 19-year highs. Following closely, the Japanese 10-year yield too shot up to its highest level in 30 years. Leading market gurus call this a “major global risk-off trigger.” For our markets it raises the risk of outflows coupled with further headwinds for the currency.
Nilesh Shah, MD – Kotak Mahindra AMC explained that, “When debt is rising faster than income, two things can happen. If the dollar depreciates more than the extra yield the Fed is offering, money can leave. If the dollar firms along with higher rates, money can still flow in. The direction of the currency will decide the direction of flows more than the size of the hike.”
Market veteran Ajay Bagga pointed out that, “The surge in the US 10-year Treasury yield crossing the 5% mark to reach multi-decade highs is a major global risk-off trigger. When a virtually risk-free asset like a US sovereign bond offers 5%, it completely recalibrates global cost-of-capital assumptions, raising the required hurdle rates across all risk assets globally.
What’s triggering the sharp spike in US yield
The US Treasury yields jumped overnight in their sharpest daily increase since the Liberation Day market rout last year, after a stronger-than-expected purchasing managers’ report ignited fresh inflation fears. The auction of five-year notes was poorly received in the US and further pushed the yield higher.
According to Nilesh Shah, “The US Federal Reserve hiked rates by 25 basis points, and markets have already priced in another 25 bps rate hike with potential for more rate hikes if inflation remains persistent. That is not a surprise. What the market likes is that the Fed is still establishing its credential as an independent institution. Ten-year US Treasury yields sitting above 5% are the bond market’s way of saying the same thing: inflation has stayed above target for too long, and fiscal arithmetic is no longer a footnote.”
He pointed out that “the United States earns about $5.5 trillion and spends about $7.5 trillion. A $2 trillion annual deficit on a $40 trillion debt stock is not a one-year problem. It is a trajectory.”
How will the spike in the 10-year impact Indian markets
The impact of the rising US 10-year yield is multi-fold in the Indian market context.
#1 Foreign Outflows
One of the key concerns with regards to a hardening US yield is the impact on foreign outflows. The yield spread between Indian 10-year G-Secs (6.5–6.7%) and US 10-year Treasuries (5.0%) has narrowed dramatically to near historic lows. As a result, this leads to an arbitrage squeeze and “overseas institutional capital faces little incentive to take currency or emerging-market risk when safe US yields offer comparable real returns. Expect continued net FPI outflows, particularly targeting liquid large-cap index heavyweights. The baseline hurdle rate for global capital allocation is no longer zero or low rate; 5% US yields redefine global asset pricing formulas,” Bagga added.
According to him, “global macro tightening creates sustained offshore selling, but strong domestic retail liquidity remains India’s primary structural defence. In high-yield environments, balance sheet strength, low net debt, and strong domestic cash flows take priority over high-multiple speculative growth stories.”
#2 IT Sector Headwinds
The higher yield is also a concern for the IT sector. Though a weaker rupee, another indirect impact of hardening yield, is traditionally a tailwind for Indian IT sector, higher long-term US yields moves market dynamics differently.
A higher yield typically signals tightening corporate spending and delayed tech budgets by key tech clients. This could in turn impact the revenue outlook for Indian tech companies even in a weak rupee scenario.
#3 Pressure on the Indian Rupee & RBI policy outlook
The risk of currency headwinds is another big concern. “Dollar demand triggered by capital repatriations places immediate pressure on the dollar-rupee exchange rate. Coupled with volatile crude oil prices, a weaker rupee elevates energy import costs, widening India’s current account deficit,” Bagga pointed out
According to him, higher global rates severely restrict the RBI’s flexibility to ease domestic interest rates, “prolonging a ‘higher-for-longer’ domestic stance to defend the currency and prevent yield differentials from narrowing further.”
Nilesh Shah pointed out that, “For India the immediate variables are different. A monsoon deficit of around 15% can push inflation higher though still within the target range of the RBI. Oil in triple digits, supply-chain disruption, and higher US yields can drag down Growth’s trajectory.”
Investor sentiment muted
Overall, the sentiment is muted across the Indian market today. But investor concern is more long-term. The key question is if the US yield stays elevated, how would it impact our rate policy, especially with RBI policy coming up in less than 10 days. Moreover, the impact of elevated Yield on foreign flows and currency is something that the street is monitoring continuously.