The enthusiasm of global equity investors which was fuelled by gradual re-opening of the world economy has been punctured by rising bond yields. Yields on the benchmark 10-year US Treasury note crossed the 1.6% level, the highest in more than a year. This in turn triggered a sell-off on the Wall Street on Thursday. Taking cues from US equities, major Asian indices, including India’s Nifty50 shed more than 3% intraday on Friday.


                             


“The 10-year yield is still almost 70 basis points lower than the bond market’s inflation expectation, and, historically, yields have usually traded above the expected inflation rate. There is definitely more upside coming in bond yields," James Paulsen, chief investment strategist at The Leuthold Group, said in a report on 25 February.


“Our expectation is for the 10-year yield to reach 2% by the end of this year. So, bondholders need to stay buckled-up and, if yields keep exceeding the “upward re-adjustment speed limit," the stock market will likely hit some turbulence as well," he added.

Paulsen, however, feels the surge in bond yields will soon take a breather around the 1.5% mark, before venturing on another leg higher.

According to analysts, the rapid rise in yields began with the failure of the Treasury’s auction of 7-year notes on Thursday. Expectations are that inflation would make a comeback as demand growth as the scale of vaccination picks pace globally. A rising inflation would mean a reversal in the accommodative monetary stance of global central banks. The gush of liquidity has held global equity markets in good stead despite the limping world economy. Also, higher interest rates will push up the cost of loans for corporates.


In a note dated 26 February, analysts at US-based research house ING said, the rise in US yields has been a driver of higher core yields globally, and with US real yields still in the negative, there is room for upside. “This is turning into an inflation tantrum. In the end, a spot of tapering later in 2021 may be needed to offer some inflation protection to the back end," added the note.

ING analysts also highlighted that the correction in global equities is partly due to the froth in the system, coming from the buckets of liquidity that is swooshing around. “It's just a small part, but one that the Fed will want to tighten up. There is a rate hike coming. Not a fed funds hike, but a hike in repo and excess reserve rates," said the report.