We have already seen a huge correction globally in last 15 days owing to the fact of rising bond yields. The bond yields across the world are an all-time high due to the rise of inflation and data of higher wages published in the US. The aftermath of LTCG in the budget and rising bond yields have impacted Indian market too.
So let us understand this jargon of bond, bonds yields and its relation to inflation and then at the end, as usual, we will see its effect on Indian equity market.
A bond is typically a tool of the capital market via which the company raises money. The bond has two things 1. Face value and 2. Fixed rate of interest for a specified period of say 5 to 10 years. Now suppose a company wants to raise 500cr from the market and issues a bond at the face value of 5000 with the annual interest of 10%, then, the investor can buy bonds in the multiple of Rs.5000 from the company as per his requirement and he will get 10% interest rate accordingly.
Many times these bonds are also traded in the secondary market very similar to the trading of shares. As we all know that prices of shares [increases/decreases] on daily basis based on [demand/supply] equation or news-based events, similarly the bonds prices also affected.
Let us consider you are the owner of the bond with a face value of Rs.5000 and fixed interest rate of 10%, so annually you will get Rs. 500 as an interest on bonds. Now after one year, you want to sell this bond at a current market price which is Rs.4800(decreases due to rising in inflation)[ See Fact2 below ], you will still be in a profit of Rs.300. Now the person who buys a bond from you at Rs. 4800 would be happier as he will get fixed interest of Rs.500( equivalent to an interest rate of 10.41%). Therefore, mathematically, as the price of the bond decreases the bond yield increases. So as an investor, the ideal time to invest in the bond market is when bond yields are high.
Impact on Indian Equity
The rise of bond yields across the world will have a negative impact on Indian Equity market as the investors are finding the bond market an excellent opportunity at this juncture. So, all around the world lot of fund managers are shifting their focus from equity market to Fixed Maturity Plans as rising bond yields in last one month leading to the better post-tax return. However, the only caution is the low liquidity in the FMPs even though they are listed, so exiting them before maturity may be a big risk.
But here in investorzone.in, we recommend that one should look to cash on this opportunity of rising bond yields to buy good fundamental stocks on every dip.
Fact1: Bonds are inversely proportional to Bond yields
Fact2: With rising inflation, the Bond value decreases.
Fact3: Higher the wages, Higher will be the spending,
Fact4: Higher the spending, Higher will be the Inflation