The BSE Sensex closed lower for the sixth consecutive day, reflecting a major sell-off among Foreign institutional investors/ Foreign Portfolio Investors (FIIs/FPIs).

• The market was impacted by mixed corporate earnings and concerns over the tightening of the U.S. tariff regime on imports.

About Bond Yield

• Bond yield refers to the return an investor earns from holding a bond until maturity.
• It is influenced by interest rates, market demand, and economic conditions.

Yield Curve and Variations

• The yield curve represents the relationship between bond yields and their maturity periods.
• Types of Yield Curves:
  • Normal Yield Curve: Long-term bonds have higher yields than short-term bonds, indicating economic growth.
  • Inverted Yield Curve: Long-term yields are lower than short-term yields, signaling a possible recession.
  • Flat Yield Curve: Short-term and long-term yields are similar, reflecting economic uncertainty.
• Bond Price and Yield Relationship:
  • When bond prices fall, yields rise.
  • When bond prices rise, yields fall.

Difference Between Bond Yield and Interest Rates

RBI’s Role in Managing Bond Yield

• Conducting Open Market Operations (OMO): RBI buys government securities from banks and investors via auctions. This increases demand for bonds, helping control rising yields.
  • RBI decides the quantum of each OMO based on yield movements and liquidity conditions.
• Operation Twist : RBI buys longer-term bonds while selling shorter-term bonds simultaneously.
  • This prevents excess liquidity while stabilizing longer-term yields.
• Intervening in Weekly Debt Auctions: The government borrows weekly via bond auctions where investors place bids. RBI can partially devolve securities on underwriters if yields exceed comfort levels.
• Extending Held-to-Maturity (HTM) Limits: RBI raised the HTM limit to 23% of banks’ deposits, insulating them from market depreciation losses.
  • If yields rise further, RBI may extend the timeline to support bond demand.
• Strengthening the Retail Debt Market:  RBI’s Retail Direct Scheme encourages direct investment in government securities.
  • Enhancing awareness and accessibility could broaden the investor base and stabilize yields.

About Stock Market

• Definition of Stock Market: The stock market is a platform where shares of publicly listed companies are bought and sold. 
  • It allows investors to trade company stocks and enables businesses to raise capital.
• Global Stock Markets:
  • New York Stock Exchange (NYSE): The world’s largest stock exchange.
  • NASDAQ: National Association of Securities Dealers Automated Quotations  is known for technology stocks like Apple, Microsoft, and Google.
• Indian Stock Markets:
  • Bombay Stock Exchange (BSE): Asia’s oldest stock exchange.
  • National Stock Exchange (NSE): India’s largest exchange, home to the NIFTY 50 index.

Impact of Rising Bond Yield in U.S.  on Indian Market

• Higher Returns with Lower Risk: When U.S. bond yields increase, the risk-reward ratio of Indian equities declines. FIIs and FPIs reduce their equity exposure in emerging markets like India and move funds to safer U.S. bonds.
• Stronger U.S. Dollar : Rising U.S. bond yields increase demand for the U.S. dollar, strengthening it against other currencies.
  • A weaker rupee makes Indian assets less attractive to foreign investors.
  • FIIs sell Indian stocks and repatriate their funds, further weakening the rupee.
• Higher Borrowing Costs for Indian Companies:  Higher global bond yields lead to increased domestic borrowing rates. Indian companies relying on foreign debt face higher interest costs.
  • Corporate profitability declines, negatively impacting stock market sentiment.

Relation Between Bond Yield and Stock Market

• Stock Markets and Bond Yields Have an Inverse Correlation
• Rising Bond Yields leads to  Bearish Stock Market
  • Higher Borrowing Costs for Companies: Increased bond yields result in higher interest rates on loans and corporate bonds.
    • Higher borrowing costs reduce corporate profits, leading to a decline in stock prices.
  • Attractive Fixed-Income Returns: Higher bond yields make bonds more attractive than stocks.
    • Investors shift money from equities to bonds, leading to a stock market sell-off.
  • Inflationary Pressures: Rising bond yields often reflect higher inflation expectations.
    • Higher inflation erodes future corporate earnings, making stocks less attractive.
  • Tighter Monetary Policy: Rising bond yields suggest central banks (RBI, U.S. Fed) are tightening monetary policy.
    • Higher interest rates slow economic growth, negatively affecting stock market performance.
• Falling Bond Yields leads to Bullish Stock Market
• • Lower Borrowing Costs: Lower bond yields reduce interest rates, making borrowing cheaper for businesses.
    • This boosts corporate profits, leading to stock market gains.
  • Less Attractive Bonds: When bond yields fall, bonds provide lower returns.
    • Investors move funds to riskier assets like stocks, increasing demand for equities.
  • Economic Growth Expectations: Falling bond yields may indicate loose monetary policy, promoting economic expansion.
    • This benefits stock markets by supporting higher earnings and valuations.

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