Topic 2: GOING HIGHER US BOND YIELDS

Rising US Fed rates are pushing the US bond yields to the highest levels in 16 years. The uncertainty still prevails about the future interest rates in the US. Fed officials are still considering more rate hikes in future due to the strong economy and tight job market. Rising bond yields might be an indication of rising inflation and anticipating potential economic slowdown turning the cost of borrowing money higher. Apart from this increased bond supply and macro as well as geopolitical uncertainty have contributed to a rise in yields. Modern monetary policy works on the principle of monetary transmission. Monetary transmission implies that changes in policy rates are transmitted to other interest rates in financial markets: bonds, deposits and loans. Also, the high budget deficits and debt levels of the US economy have pushed yields higher. The markets were aware of rising US debt but due to low interest rates, they were not counted. Interest rates rising and high public debt are pushing the bond yields higher. Markets across the world depend upon US Fed actions, as the US bond yield rises it leads to capital outflows to US markets from the world markets. Moreover, due to geopolitical uncertainties and the slowdown in economies, the US bonds are the safe haven at a higher rate. The US economy attracts more global investors with the rising interest rates. The capital outflows from other countries lead to a fall in equity markets and depreciation of the currency. The impact of rising US interest rates was seen in 2022 as well when the currencies depreciated against the US dollar leading to meltdown in UK and European markets. The central bank of Indonesia was forced to increase its policy rates to prevent these outflows. So if the bond yields are higher the investment in equity markets drops significantly, and the risk-averse investors would shift their capital into debt. The FIIs would pull out their money from emerging markets like India and would invest in US Debt taking advantage higher of dollar returns in comparison to other currencies. With US treasury bonds giving 5% dollar returns the ask rate for equities increases significantly considering the risk and currency hedging. But Indian markets may fare better despite higher interest rates because of its good economic numbers and better future prospects. Indian debt markets saw a sharp rise in the FIIs investments in October, despite there is no change in the interest rates by MPC which could reduce the spread between Indian and US government securities.FIIs are buying on the superior growth prospects and resilient domestic economy among the other emerging markets.

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