A short thread on making sense from rising US bond yields.
There are broadly 2 occasions when US Bond yields have risen post stimulus.
1. Policy tightening or signals of policy tightening by the US Fed.
2. Strong reversal in growth and rise in inflation expectations.
1/n
There are broadly 2 occasions when US Bond yields have risen post stimulus.
1. Policy tightening or signals of policy tightening by the US Fed.
2. Strong reversal in growth and rise in inflation expectations.
1/n
Let's see what are the implications on equity markets and other economic factors under each of the above scenario.
1. Rise in US Bond yields due to policy tightening.
US Bond yields rise sharply if there's premature withdrawal of stimulus that was announced during crisis.
2/n
1. Rise in US Bond yields due to policy tightening.
US Bond yields rise sharply if there's premature withdrawal of stimulus that was announced during crisis.
2/n
This usually leads to sudden tightening of easy global liquidity.
This happened during 2013 when US Fed announced tapering of its bond buying program.
In 2013 market participants were shocked and reacted very adversely leading to taper tantrums.
3/n
This happened during 2013 when US Fed announced tapering of its bond buying program.
In 2013 market participants were shocked and reacted very adversely leading to taper tantrums.
3/n
Usually such reactions are sharp as growth is not yet fully recovered and any tightening in liquidity can lead to crisis and hurt growth recovery.
USD strengthens and INR and other emerging markets currencies correct sharply. Commodities too correct sharply.
4/n
USD strengthens and INR and other emerging markets currencies correct sharply. Commodities too correct sharply.
4/n
Equity markets also witnesses steep correction as liquidity dries up.
If you recollect 2013, all these moves were visible across asset classes.
Situation may be controlled if Fed assures a calibrated approach to tightening and is willing to support growth.
5/n
If you recollect 2013, all these moves were visible across asset classes.
Situation may be controlled if Fed assures a calibrated approach to tightening and is willing to support growth.
5/n
2. Rise in US bond yields due to strong growth recovery.
US bond yields rise when growth recovery is strong and there are inflation expectations building up.
It is broadly normalisation process when economy is getting reset.
This process is very gradual.
6/n
US bond yields rise when growth recovery is strong and there are inflation expectations building up.
It is broadly normalisation process when economy is getting reset.
This process is very gradual.
6/n
This doesn't disrupt other asset classes as there is no sudden change in liquidity.
Usually currencies are stable and they smoothly adjust to new normal. No adverse impact on BOP too.
Commodities rise due to strong growth and thereby demand visibility.
7/n
Usually currencies are stable and they smoothly adjust to new normal. No adverse impact on BOP too.
Commodities rise due to strong growth and thereby demand visibility.
7/n
This may also be termed as reflation and equity markets continue to rise or consolidate as US Fed is still accommodative and liquidity is enough.
Later when policy normalisation starts, equities can see some correction.
Recollect 2009, these trends were clearly visible.
8/n
Later when policy normalisation starts, equities can see some correction.
Recollect 2009, these trends were clearly visible.
8/n
The moot point today is... what is attributing to rise in US Bond yields.
Clearly there's no unwinding that is announced or anywhere in the picture.
INR has been stable and commodities haven't corrected. Hence, rise in yields due to unwinding of stimulus may be ruled out.
9/n
Clearly there's no unwinding that is announced or anywhere in the picture.
INR has been stable and commodities haven't corrected. Hence, rise in yields due to unwinding of stimulus may be ruled out.
9/n
On the other hand, growth has recovered to pre-Covid levels in many economies and inflation expectations are growing.
US Bond yields may be reacting to rising inflation expectations amidst growth recovery. Equity markets haven't lost its steam and appears strong.
10/n
US Bond yields may be reacting to rising inflation expectations amidst growth recovery. Equity markets haven't lost its steam and appears strong.
10/n
The factors are conclusive enough to tell us where we are and what is driving rise in US bond yields.
History may not repeat, but may rhyme.
Let's see what lies ahead.
11/end
History may not repeat, but may rhyme.
Let's see what lies ahead.
11/end
• • •
Missing some Tweet in this thread? You can try to
force a refresh
