Bond Yields: Negative Bond Yelds Abroad Won’t Affect Your Portfolio

By Joydeep Sen

Normally, bonds have positive yields i.e., you would expect a return for buying a bond. Negative yield means you have to actually pay for buying the bond. As an example, if a bond has an interest rate of 8%, you would expect 8% return every year. Negative yield means (a) either the interest rate is negative; e.g., negative 1% interest means for `100 of face value, you have to pay `1 every year or (b) even if the interest rate is positive, the purchase price in the market is high so that even after receiving interest payment, your effective return is negative.

Currently, large swathes of bonds, particularly in developed countries, are trading in negative yield. As per estimates, $14 trillion of bonds are in negative territory, representing approx 35% of outstanding government bonds globally.

 

Relevance

Though nowadays markets are inter-connected globally—movement in equity markets in one part of the world influences markets in other parts of the world— the impact of global negative bond yields on bond yields on India is limited. One reason is that there are regulatory limits on how much foreign portfolio investors (FPIs) can invest in bonds in India.

The other reason for limited relevance is the interest rate structure. In Euro-zone, central bank administered interest rate is zero to negative whereas in India the RBI repo rate is 5.75%. The impact of low or negative bond yields globally is on market trades; sentiments are influenced and it pushes our bond yields lower, but to a limited extent.

The other relevance is on RBI rate formulation. The primary factors for RBI’s rate decision are inflation in India, growth in India, level of currency, etc. Along with these, global interest rates is one of the factors considered by the RBI, and drastically low / negative rates help the RBI in lowering our interest rates.

Many central banks globally have reduced rates in the recent past, which would be one of the factors for discussion in the RBI Monetary Policy Committee meeting scheduled on August 7 and is favourable for reducing repo rate from 5.75% to 5.5%. If interest rates come down, to the extent lower RBI repo rate is passed on by banks, it will help you avail of bank loans at easier rates, but your bank deposits will fetch lower.
Impact on equity market

The other relevance is the message for equity market. Normally, such low or negative bond yields globally would be taken as a sign of forthcoming recession, which is negative for equity markets. However, globally, equity markets are buoyant. That is to say, global bond and equity markets are giving opposite signals: bond markets are signalling recession whereas equity markets are signalling growth. Here again, the structure of the market is important: India is a growth economy whereas advanced countries are growing at a much lower rate. This is supportive of the equity market in India.

Conclusion
So much of negative bond yield globally is an unusual phenomenon. As discussed, the impact on India is limited. About the possibility of recession, only time will tell if it is happening or not. Even if it happens, equity in India is the better place to be, given the inherent growth potential in our country.

Source: https://www.financialexpress.com/market/bond-yields-negative-bond-yields-abroad-wont-affect-your-portf

(Visited 5 times, 1 visits today)

Leave A Comment

Your email address will not be published. Required fields are marked *