Global bond yields rise, should it worry global equity investors? Check details

As global investors cheer the continued rally to new record highs, bond yields are signalling caution. Equities and bond yields share an inverse relationship, with the former being riskier than the latter. In the current market scenario, where the global equity market indices of major economies like the US, Japan, China and Germany are hovering around record high levels, the long-term bond yields should theoretically follow a downward trend. However, long-term bond yields with 10-year tenure are witnessing increased investor interest, pushing the yields higher. Should the rising bond yields be considered as a worrying signal to equity investors?

What do rising bond yields indicate?

United States of America: The US markets have witnessed a sharp rally in equity markets in the last year, amidst the buoyant investor confidence over AI stocks. However, the underground economic conditions paint a different picture. Rising unemployment, increasing government debt levels and sustained inflation point towards a cautionary and bleak picture. Hence, despite the recent rate cut by the Federal Reserve of 25 bps, the US 10Y bond yields have jumped 2.4% in three sessions.

The elevated bond yield indicates a persistent and higher inflation in the US economy in the long run. As the Federal Reserve governor indicated, the full impact of tariffs on the prices of products is yet to be ascertained, adding more worry towards the economic outlook.

Japan: The Japanese benchmark index Nikkei fell nearly 2% on Friday morning after the benchmark Japan 10Y jumped over 2.4%. Japan’s inflation has persistently stayed at high levels, prompting the central bank to announce tightening measures. Market participants now expect the Bank of Japan to increase the interest rates by the year-end.

The Japanese benchmark indices have rallied over 22% since September 2024, making it one of the best-performing markets in the world. As yields elevate further, experts predict a word of caution for equity investors after the record rally in the Japanese markets.

How do rising global bond yields impact Indian markets?

The elevated yields of major global economies create a risk-off environment among global institutional investors as they prefer holding back higher tenure government securities. It drives away incremental flows from emerging markets like India towards stable income assets like bonds. Historically, the Federal Reserve rate cut has boosted emerging markets with a risk-on environment amongst investors. However, with rising bond yields, the much-expected FII influx could get delayed further. Though it is not necessarily indicates a shift in policy stance but more of a portfolio diversification measure.