Rising yields is giving traders an unpleasant déjà vu of the 2013 ‘taper tantrum’ where markets sold off aggressively as the money markets signaled the end of cheap money. Even though the surge is not as dramatic as 8 years ago it is enough to send equities into a tizzy.
So why do stock markets get rattled by rising bond yields.
Firstly, Rise in yields indicate the money markets betting on the possibility of higher rates by the central bank as inflation bets rise. In the US its mostly due to improving economic data and traders worried the fed will shift low rates stance earlier than anticipated. Prices in India have been subdued so far but with sharp rises in fuel prices the RBI has also sounded off the concern on inflationary pressure.
Secondly, Investors also reassess portfolio allocations are yields rise, betting more on cheaper safer bond markets as returns become more attractive.
Finally, the cost of capital also rises significantly with rising yields and the debt pressure on the corporate sector enlarges in turn adding pressure on to the stock.