US 10-year Treasury yields have crossed 5% for the first time since 2007, reaching 5.03% on Tuesday and putting significant pressure on global markets. According to NDTV Profit, the benchmark yield touched this 19-year high as investors reassess the outlook for interest rates, inflation and government borrowing. The Nifty 50 fell 0.8% to 23,207.45 by 2:20 p.m. on Tuesday, reflecting the broader market impact of these elevated yields. This development follows Fed funds futures suggesting an over-80% chance the central bank raises its rate of 3.5%-3.75% by a quarter-percentage point, following hotter-than-expected consumer inflation data.
Indian government bond yields have risen as global yields climb, with the India-US 10-year yield spread narrowing from 3.31 percentage points at the end of 2023 to 2.07 percentage points as of Tuesday. According to NDTV Profit, the US 10-year Treasury yield has risen around 70 basis points this year, while India's 10-year government bond yield has risen only around 40 bps. India's 10-year government bond yield rose 7 bps to 7.09% on Tuesday, with the Indian yield reaching its highest level since late 2023. This trend is reflected in real yields as well, with the extra income investors once earned by choosing Indian bonds over US Treasuries shrinking significantly.
The rupee fell 0.4% to ₹95.92 per dollar on Tuesday, creating additional pressure on Indian markets. As reported by NDTV Profit, higher US yields can strengthen the dollar because investors get more attractive returns from US assets, creating pressure on emerging-market currencies. The currency weakness is particularly concerning because Brent crude climbed to around $107.7 a barrel, making imported crude even more expensive in domestic currency. For India, the combination of a weaker rupee and rising crude prices creates an uncomfortable situation as the country remains a net importer of both oil and refined products.
While Indian equity valuations have improved with the Nifty's trailing PE declining from 23.17 times at the end of 2023 to 19.78 times as of September 15, bond yields remain a significant challenge. According to NDTV Profit, the latest 10-year government bond yield at 7.09% remains well above the Nifty's earnings yield of around 5.06%, putting the implied equity risk premium at around -2.03 percentage points. This means while the Nifty is cheaper than it was in 2023, equities still offer a lower earnings yield than risk-free government bonds. Rate-sensitive sectors like real estate and NBFCs are particularly vulnerable, while high-valuation growth stocks face pressure as higher bond yields increase the discount rate applied to future earnings.
Treasuries serve as a benchmark for global financial markets, influencing the pricing of mortgages, corporate bonds, private credit, emerging-market debt and equities worldwide. A sustained rise in US yields can make dollar-denominated assets more attractive to international investors, potentially strengthening the dollar and tightening financial conditions globally. Higher US yields can increase refinancing costs for emerging-market governments and lower-rated companies that depend on international capital. For Indian markets, the combination of US 10-year yield at a 19-year high, 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.
