Bond Yields At Two-Year High Rattle D-Street, And Rate-Sensitive Stocks Take The Hit

India’s 10-year government bond yield is hovering near 7.18 per cent, its highest since April 2024 and up from 6.60 per cent at the start of the year. The rise is putting pressure on equities, particularly sectors where borrowing costs directly affect demand and earnings.

A bond is a loan to the government or a company at a fixed rate of interest. The yield is the return an investor earns at the price the bond currently trades at. Yields and prices move in opposite directions. So, when investors sell bonds, prices fall and yields climb. 

Indian bonds had initially held up better than global peers, supported by a record liquidity surplus in the banking system. That cushion has weakened. In the US, the 10-year Treasury yield is quoting around 5.27 per cent, its highest level in nearly two decades. This makes the US government debt more attractive to global investors, particularly when the dollar is also considered a relatively safe asset.

Crude oil is adding to the pressure. Brent crude above $100 a barrel raises concerns about inflation, which can push investors to demand a higher yield on long-term bonds to compensate for the risk that inflation will erode future purchasing power.

The impact is also spilling into equities. Stocks are priced on what companies are expected to earn in future, and those earnings are discounted at a rate linked to the risk-free return on government paper. When bond yields rise, that rate also rises, putting pressure on stock valuations.

Ajit Mishra, senior vice president of research at Religare Broking, said: “High government bond yields generally create a higher risk-free return, raising the hurdle rate for equities and putting pressure on market valuations.” The hurdle rate is the minimum return investors expect before they will hold shares rather than safe bonds.

Akshat Garg, head of research and product at Choice Wealth, said: “As the discount rate rises, future cash flows are worth less today, compressing price-to-earnings multiples. High-growth, ‘long-duration’ stocks feel this first, since their value sits in distant earnings.” Long-duration stocks are those whose profits are expected well into the future.

Which Sectors Are Hit The Most

The Nifty 50 closed September at 22,620.45, down 6.10 per cent for the month, its weakest September since 2018. The benchmark index is nearly 14 per cent below its 52-week high of 26,373.20. Yields were not the only cause. Crude oil, sustained foreign selling and a weakening rupee all weighed.

Mishra added: “In India, the impact is typically more pronounced on rate-sensitive sectors, such as non-banking financial companies (NBFCs), real estate, automobiles and consumer durables, where financing costs influence demand.”

The Nifty Realty index has fallen 8.40 per cent, the Nifty Auto index has plunged the most, falling 12.40 per cent, while the Nifty Consumer Durables index is down more than 10 per cent. Real estate and autos depend on loans. Buyers finance homes and vehicles with them, and developers and dealers borrow to keep operating. When yields rise, lenders usually raise rates, and demand softens.

Banks And Lenders Under Pressure

Since its August high, the Nifty Bank has declined nearly 4.50 per cent, while the Nifty Financial Services index has fallen 8.25 per cent. Within the financial sector, the Nifty Private Bank index is down 3.80 per cent, while the Nifty PSU Bank index has declined 9.35 per cent.

Part of that came from a separate regulatory matter, a proposed cap on insurance distribution commissions that hit insurers and non-bank lenders.

For banks, higher yields can work in both directions. Mishra said, “Banks can face pressure if deposit costs rise faster than lending yields, although the impact varies with credit growth and margins.”

Garg described banks as a mixed case because higher lending yields can support margins, but their treasury portfolios can take a hit when bond prices fall.

Banks hold government securities as part of their investment portfolios. When bond yields rise, the market value of existing bonds falls. Depending on how those securities are classified and accounted for, that can result in mark-to-market losses.

Why IT Did Not Escape The Sell-Off

Analysts had expected technology exporters to be relatively better insulated from the pressure. “Conversely, IT exporters and companies with strong balance sheets may be relatively better insulated,” said Mishra.

The sector, however, has not escaped the sell-off. The Nifty IT index has fallen around 12 per cent from its August high, making it one of the worst-performing sectoral indices. Concerns over global technology spending, artificial intelligence (AI)-led disruption, demand uncertainty and stretched valuations have weighed on IT stocks.

Higher US interest rates can also put pressure on technology spending as companies become more cautious about their IT budgets. This matters for Indian IT firms, which earn a large share of their revenue from the US.

Garg said “richly-valued IT and new-age tech de-rate sharply”. In simple terms, de-rating means investors are willing to pay a lower valuation multiple for the same level of earnings.

Which Stocks Could Stay Relatively Resilient In A High-Yield Environment

In a high-yield environment, companies with strong balance sheets, healthy cash flows and pricing power can be relatively better placed. Garg said, “Historically, quality, cash-rich and pricing-power businesses weather this best.”

Higher bond yields also change the competition for investor money. Garg said, “Elevated yields also raise the equity risk premium hurdle, nudging some allocation from equities toward now-attractive bonds.”

The equity risk premium is the extra return investors want for owning shares over safe bonds. Garg believes the damage can also create openings. “For long-term investors, such phases create selective entry points rather than reasons to exit,” he said.