What Rising US Treasury Yields Mean For Indian Markets

Rising US bond yields have become the latest pain point for Indian equity markets. When global bond yields rise sharply, their impact goes well beyond debt markets. They also influence stock valuations, foreign investor flows, currency levels, gold prices, and the cost of borrowing for companies.

In other words, bond yields influence investor sentiment across most asset classes. Recently, global bond markets have turned more volatile, sending jitters across markets.

Why Are US Bond Yields Rising

The benchmark US 10-year Treasury yield has crossed 4.60 per cent, its highest level in more than a year. This comes as markets are expecting the US Federal Reserve (Fed) to keep interest rates higher for a longer period to control inflation.

According to the Chicago Mercantile Exchange’s FedWatch Tool, markets are pricing in a 96.70 per cent probability that the US Fed will keep interest rates unchanged in the 3.50–3.75 per cent range at its July 16–17 policy meeting.

For the subsequent July 28–29 meeting, the probability of a status quo eases to 88.40 per cent, while expectations of a 25 basis point rate hike rise to 10.60 per cent.

By the September 15–16 meeting, the likelihood of a 25 bps hike increases further to around 25 per cent, indicating growing market speculation around a possible policy tightening later in the year.

A key factor behind this shift is the sustained rise in crude oil prices due to geopolitical tensions in West Asia. Since the US and Israel launched their joint military offensive against Iran, the international benchmark Brent crude oil futures has climbed nearly 50 per cent.

When crude oil prices rise, it increases costs across the economy, from logistics and fuel to manufacturing. This can feed into overall inflation. In response, investors seek higher compensation for holding government debt, as inflation reduces the real value of returns. This results in lower bond prices and higher yields.

Impact On FII Flows

Higher US Treasury yields often pull foreign institutional investors’ (FII) capital away from emerging markets because these investors can earn relatively safer returns in US bonds. Aakanksha Shukla, assistant vice president, wealth management at Master Capital Services, said, "Rising US Treasury yields are drawing global capital away from emerging markets, triggering foreign investor outflows from Indian equities and pressuring rate-sensitive sectors like financials and real estate."

Nikunj Saraf, CEO, Choice Wealth, said rising US bond yields are "tightening global liquidity and increasing the attractiveness of safer US fixed-income assets."

He added that this "often triggers FII outflows from emerging markets like India, putting pressure on the rupee and market valuations, particularly in high-growth and rate-sensitive sectors."

Impact On Rupee

A stronger US dollar is a natural outcome of rising US Treasury yields, as global investors shift funds into dollar-denominated assets in search of better returns. This increased demand for the dollar puts pressure on emerging-market currencies, including the Indian rupee.

The rupee has been under pressure since the escalation of the US-Iran conflict, falling nearly 10 per cent since late February.

The lack of certainty around US-Iran negotiations, coupled with higher crude oil prices, have kept import costs high and are gradually weighing on currency sentiment. This broader pressure is also reflecting in the performance of the rupee.

Shukla said, “A stronger dollar weighs on the rupee, raising import costs and squeezing corporate margins.”

Impact On Equity Valuations

Higher bond yields tend to weigh on equity valuations as they increase the discount rate used to value future earnings. Higher discount rates reduce the present value of those earnings, leading to valuation compression across markets. “Higher yields also compress equity valuations by lifting discount rates on future earnings,” Shukla said.

Saraf added that “higher US yields raise the global cost of capital, making investors more cautious towards risk assets such as equities.”

The impact is typically more pronounced in growth-oriented sectors such as technology and new-age businesses, where a larger share of earnings is expected in the future.

Impact on Banks and NBFCs

Rising bond yields can also have a direct impact on banks and non-banking financial companies (NBFCs) in India. As global yields inch higher, domestic bond yields tend to firm up in response, which increases borrowing costs for lenders.

Gaurav Seth, chief financial officer at Aye Finance, said, “As an NBFC, we borrow from banks and other institutions for onward lending. When global yields rise, Indian bond yields tend to harden in tandem, which pushes up our cost of borrowing.”

He further noted, “Additionally, since NBFCs are often significantly held by foreign investors, a rising global yield environment can trigger some FII outflows, as risk-free dollar returns become relatively more attractive.”

According to Seth, “Both factors — margin pressure and flow-driven selling — tend to weigh on NBFC stocks.” Given the heavy weightage of financials in benchmark indices, weakness in banks and NBFCs can also have a broader impact on overall market sentiment.

How Should Investors Position Their Portfolios?

In the current volatile global backdrop, experts suggest that investors focus on quality and stability rather than aggressive positioning.

In the current volatile environment, Shukla, recommends, “Investors should prioritise resilience over aggression.” She suggests increasing exposure to large-cap equities, quality financials, and domestic consumption themes, while reducing exposure in richly valued or highly leveraged stocks.

She also recommends short-duration debt funds and hybrid funds for relative stability in a high global yield environment. In addition, she advises keeping a small allocation to gold as a hedge and continuing SIPs to support long-term wealth creation.

She added, “Crucially, any portfolio reshuffling must remain anchored to individual financial goals and time horizons, not driven purely by short-term market sentiment.”