Worldwide bond yields rise amid prospects of rising interest rates

- Central banks around the world are considering raising interest rates to curb skyrocketing inflation following the Corona epidemic, not to mention India.

The rise in bond yields has been attributed to higher inflation in the country, rising fiscal deficit, trade deficit, concerns over growth in industrial production and rising credit-to-deposit ratios of banks.

Let us now discuss in detail how an increase in bond yields will affect equity investors. What are bonds and bond yields? Bonds are basically a receipt of a loan in which an investor lends money which is usually corporate or government. Simply put, bonds are a means of lending, allowing various institutions, such as corporates and governments, to raise funds from the market.

Bonds are traded like stocks. As companies / governments issue bonds to raise money, they pay fixed interest to bondholders known as coupon rate. Bonds are traded in the same way as stocks. This return is called bond yield. For example, if an investor invests Rs. A 10-year bond worth Rs. 10,000 is purchased at a coupon rate of 5%. You will get interest of Rs.500. But during trading, if the bond price is Rs. If it reaches 5,000 then your yield or return will be 2.5% (Rs.500 / Rs.5000 * 100).

Thus, bond yields and prices move in opposite directions, yields fall when bond prices rise and yields rise when bond prices fall.

Why is the yield increasing?

Several factors are playing an important role behind the rise in bond yields. Hopes of economic recovery, largely due to large-scale vaccinations, are increasing bond yields. Thus the rate of inflation is also going up behind the hope of economic recovery. Rising inflation causes bond prices to fall, leading to higher yields. In addition, crude oil prices in global markets have reached a new seven-year high which is a matter of concern for corporates, the general public and the government.

From an investor's point of view, the effects of rising bond yields on equity investors have led many banks to raise their lending rates due to rising bond yields. As bond yields rise, banks are expected to raise interest rates on deposits. To compensate, banks will raise interest rates on loans. Thus, companies may be forced to take out high-interest loans which will have an impact on their projects and ultimately profitability.

The cost of capital is the average weightage of the cost of equity and the cost of debt. If the bond yield increases, it means that the value of capital increases and therefore the current valuation is more disappointing. Past statistics show that whenever bond yields rise, investors, including large institutional investors, choose to withdraw their investments in the equity market and focus on bonds. This was to be expected and it also indicates that the pace of recovery in the country and around the world is improving and moving in the right direction, despite the ongoing transition to a new variant of the Covid-12 virus epidemic.

Investment metrics

• Rising bond yields have been attributed to high inflation, rising deficits and trade deficits.
• Companies / Governments issue bonds to raise money, they pay a fixed interest called coupon rate.
• Bond yield and price move in opposite direction, when bond price increases, yield decreases and vice versa.
• If lending rates rise, companies will have to borrow at higher interest rates, which will adversely affect their profits.
• If bond yields rise, companies' capital or loan costs also increase, which affects their valuation.
• The high yield offer forced the RBI to cancel the bond bid

Rising bond yields following a record borrowing proposal in the recently released Union Budget forced the Reserve Bank to cancel the auction of two bonds last Friday. Investors generally try to get higher interest rates in the market when the supply of bonds increases. Yields on India's 10-year government bonds rose to 7.5 per cent on Friday, the highest level since June 2016.

The Reserve Bank of India (RBI) has not accepted the bids for maturity bonds of 203 and 204 in the auction. The high bond yield offer is responsible for not accepting a single bid which the RBI cannot afford. The RBI on Friday accepted a bid of only Rs 10.50 crore for government securities against an offer of Rs 2,000 crore.