US Bond Yields Hit 19-Year High: Why India's Rupee, Bonds, Stocks Can Feel The Heat

The US 10-year Treasury yield has crossed 5%, reaching its highest level since 2007, putting pressure on global markets as investors reassess the outlook for interest rates, inflation and government borrowing.

The benchmark yield touched 5.03% on Tuesday, while Indian equities came under pressure, with the Nifty 50 falling 0.8% to 23,207.45 by 2:20 p.m.

However, for India, the impact of this 19-year high US Yield is felt across the Indian rupee, government bonds, and equity valuations, not just on headline indices. The concern is particularly relevant because India's yield advantage over US Treasuries has already narrowed sharply over the recent years.

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US Yields Rising Faster Than Indian Yields

The US 10-year yield has risen around 70 basis points this year, compared with roughly 40 bps for India's 10-year government bond yield.

The India-US 10-year yield spread has consequently narrowed from 3.31 percentage points at the end of 2023 to 2.07 percentage points as of Tuesday.  

A narrower spread means the additional return investors get for holding Indian debt instead of US Treasuries has reduced.

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Rupee Faces Pressure

Higher US yields can strengthen the dollar because investors get more attractive returns from US assets. That creates pressure on emerging-market currencies.

The rupee fell 0.4% to Rs 95.92 per dollar on Tuesday, while Brent crude climbed to around $107.7 a barrel. For India, the combination is particularly uncomfortable because a weaker rupee makes imported crude even more expensive in domestic currency.

Indian Bonds Could Remain Under Pressure

India's 10-year government bond yield rose 7 bps to 7.09% on Tuesday. Higher global yields can push Indian borrowing costs higher as investors demand better returns from domestic debt.

That matters beyond government finances. Higher market yields can increase the cost of fresh borrowing for companies, particularly businesses that rely heavily on debt.

Nifty Valuations Have Improved, But Bond Yields Remain A Challenge

The Nifty's trailing PE has declined from 23.17 times at the end of 2023 to 19.78 times as of Sept. 15, and that has pushed the earnings yield up from 4.32% to 5.06%. This means valuations have become cheaper and the earnings yield cushion has improved.

However, the latest 10-year government bond yield at 7.09% remains well above the Nifty's earnings yield. This puts the implied equity risk premium at around -2.03 percentage points. In other words, while the Nifty is cheaper than it was in 2023, equities still offer a lower earnings yield than the risk-free government bond.

That is where a further rise in bond yields becomes important: if Indian bond yields rise while the Nifty's earnings yield remains around 5%, the negative equity risk premium could widen further, putting pressure on equity valuations.

Rate-Sensitive Stocks Could Feel It First

Coming to the sectors, real estate and NBFCs are at the forefront of facing the heat first, as they are highly leveraged sectors. Other highly leveraged businesses or particular companies are also vulnerable because higher interest rates increase financing costs.

High-valuation growth stocks can also face pressure as higher bond yields increase the discount rate applied to future earnings.

So, for Indian markets, US 10-year yield at a 19-year high, coupled with crude above the $ 100-per-barrel level, and a weaker rupee, could keep Indian bond yields under pressure and further widen the negative equity risk premium. While lower Nifty valuations and stronger earnings can provide some cushion, persistently higher global yields could limit the upside for equities and keep rate-sensitive and high-valuation stocks more vulnerable to volatility.

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