US yields have experienced a sharp correction in November, with the 2-year yield breaking below multi-month support and the 10-year yield dropping 70 bps from its October high of 5%. This has led to a widening of yield spreads between US and Indian bonds, attracting inflows to emerging market assets, including Indian equities.
Factors Driving US Yield Decline
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Mellow inflation print: US inflation came in at 3.2% in October, down from 3.7% in September, prompting expectations of an extended pause by the US Fed in December and a quicker pivot to an accommodative policy stance in 2024.
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High US borrowing: The US Treasury’s plans to raise more shorter-maturity debt to plug the fiscal deficit have arrested some of the drop in 2-year yields, leading to a sharper correction in 10-year yields.
Future Yield Trajectory
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US Fed expectations: Most analysts expect the US Fed to keep rates unchanged in December and price in a rate cut around mid-2024.
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Core inflation: Core inflation remains sticky at 4%, suggesting that a minority of market participants expect a rate hike in December.
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Indian bond yields: Indian bond yields have not budged despite expectations of a rate cut by the RBI around early-mid 2024.
Impact on Indian Stock Markets
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Widening yield spreads: The widening yield spread between US and Indian bonds has drawn interest towards emerging market assets, including Indian equities.
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FIIs turn net buyers: After selling Indian equities worth almost Rs 30,000 Crore in October, FIIs flipped in November and turned net buyers to the tune of Rs 6,000 Crore.
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Technical indicators: Technical indicators have turned favorable, with the Nifty breaking over the previous swing-high of 19,850.
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Resilient Indian economy: India’s Q2 GDP growth of 7.6% has surpassed expectations, attracting both foreign and domestic institutional investors.
Conclusion
Falling US yields and widening yield spreads are favorable for emerging market assets, including Indian equities. However, India’s sustained economic resilience has played a crucial role in attracting and retaining investor interest. As yields mellow to long-term average levels, a risk-on sentiment is expected to further support Indian equities.
