{"id":155339,"date":"2025-02-13T19:35:23","date_gmt":"2025-02-13T14:05:23","guid":{"rendered":"https:\/\/pwonlyias.com\/stage\/?post_type=current-affairs&#038;p=155339"},"modified":"2025-02-14T11:29:48","modified_gmt":"2025-02-14T05:59:48","slug":"bond-yield-and-stock-market","status":"publish","type":"current-affairs","link":"https:\/\/pwonlyias.com\/stage\/current-affairs\/bond-yield-and-stock-market","title":{"rendered":"Relation Between Bond Yield and Market"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">The BSE Sensex closed lower for the sixth consecutive day, reflecting a major sell-off among<\/span><b> Foreign institutional investors\/ Foreign Portfolio Investors (FIIs\/FPIs).<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The market was impacted by mixed corporate earnings and concerns over the tightening of the U.S. tariff regime on imports.<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-size: 18pt;\"><b>About Bond Yield<\/b><\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Bond yield <\/b><span style=\"font-weight: 400;\">refers to the return an investor earns from holding a bond until maturity.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It is influenced by interest rates, market demand, and economic conditions.<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-size: 18pt;\"><b>Yield Curve and Variations<\/b><\/span><\/h2>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-155334 alignright\" src=\"https:\/\/pwonlyias.com\/stage\/wp-content\/uploads\/2025\/02\/134-67adfa4daf13b.webp\" alt=\"Bond Yield\" width=\"454\" height=\"324\" srcset=\"https:\/\/pwonlyias.com\/stage\/wp-content\/uploads\/2025\/02\/134-67adfa4daf13b.webp 637w, https:\/\/pwonlyias.com\/stage\/wp-content\/uploads\/2025\/02\/134-67adfa4daf13b-300x214.webp 300w\" sizes=\"(max-width: 454px) 100vw, 454px\" \/><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">The yield curve represents the relationship between bond yields and their maturity periods.<\/span><\/li>\n<li><b>Types of Yield Curves:<\/b>\n<ul>\n<li><b>Normal Yield Curve<\/b><span style=\"font-weight: 400;\">: Long-term bonds have higher yields than short-term bonds, <\/span><b>indicating economic growth.<\/b><\/li>\n<li><b>Inverted Yield Curve<\/b><span style=\"font-weight: 400;\">: Long-term yields are lower than short-term yields, signaling a <\/span><b>possible recession.<\/b><\/li>\n<li><b>Flat Yield Curve: <\/b><span style=\"font-weight: 400;\">Short-term and long-term yields are similar, reflecting<\/span><b> economic uncertainty.<\/b><\/li>\n<\/ul>\n<\/li>\n<li><b>Bond Price and Yield Relationship:<\/b>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">When bond prices fall, yields rise.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">When bond prices rise, yields fall.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h3><span style=\"font-size: 16pt;\"><b>Difference Between Bond Yield and Interest Rates<\/b><\/span><\/h3>\n<div class=\"vc_table_green\"><\/p>\n<table style=\"width: 99.6988%;\">\n<tbody>\n<tr>\n<td style=\"text-align: center; width: 17.6707%;\"><b>Aspect<\/b><\/td>\n<td style=\"text-align: center; width: 40.2599%;\"><b>Bond Yield<\/b><\/td>\n<td style=\"text-align: center; width: 41.9961%;\"><b>Interest Rate<\/b><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 17.6707%;\"><b>Definition<\/b><\/td>\n<td style=\"width: 40.2599%;\"><span style=\"font-weight: 400;\">The return an investor earns from holding a bond, expressed annually.<\/span><\/td>\n<td style=\"width: 41.9961%;\"><span style=\"font-weight: 400;\">The percentage charged by a lender for borrowing money.<\/span><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 17.6707%;\"><b>Application<\/b><\/td>\n<td style=\"width: 40.2599%;\"><span style=\"font-weight: 400;\">Relevant to fixed-income securities like bonds, where yield includes interest (coupon) payments.<\/span><\/td>\n<td style=\"width: 41.9961%;\"><span style=\"font-weight: 400;\">Applies to loans, bonds, and other debt instruments, determining borrowing costs.<\/span><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 17.6707%;\"><b>Relationship to Market<\/b><\/td>\n<td style=\"width: 40.2599%;\"><span style=\"font-weight: 400;\">Inversely related to bond prices.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">When bond prices rise, yields fall, and vice versa.<\/span><\/td>\n<td style=\"width: 41.9961%;\"><span style=\"font-weight: 400;\">Set by lenders or central banks (e.g.RBI)\u00a0 and affects overall borrowing costs.<\/span><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 17.6707%;\"><b>Types<\/b><\/td>\n<td style=\"width: 40.2599%;\"><span style=\"font-weight: 400;\">Includes yield-to-maturity (YTM), which calculates total expected return on a bond.<\/span><\/td>\n<td style=\"width: 41.9961%;\"><span style=\"font-weight: 400;\">Includes nominal, real, and effective interest rates, considering inflation and compounding.<\/span><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 17.6707%;\"><b>Example<\/b><\/td>\n<td style=\"width: 40.2599%;\"><span style=\"font-weight: 400;\">A bond with a 10% yield on a $1,000 investment provides a $100 annual return.<\/span><\/td>\n<td style=\"width: 41.9961%;\"><span style=\"font-weight: 400;\">A 10% interest rate on a $1,000 loan requires the borrower to pay $100 in interest per year.<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><\/div>\n<h2><span style=\"font-size: 18pt;\"><b>RBI\u2019s Role in Managing Bond Yield<\/b><\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Conducting Open Market Operations (OMO): <\/b><span style=\"font-weight: 400;\">RBI buys government securities from banks and investors via auctions. This increases demand for bonds, helping control rising yields.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">RBI decides the quantum of each OMO based on yield movements and liquidity conditions.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Operation Twist :<\/b><span style=\"font-weight: 400;\"> RBI buys longer-term bonds while selling shorter-term bonds simultaneously.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">This <\/span><b>prevents excess liquidity while stabilizing longer-term yields.<\/b><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Intervening in Weekly Debt Auctions:<\/b><span style=\"font-weight: 400;\"> The government borrows weekly via bond auctions where investors place bids. RBI<\/span><b> can partially devolve securities on underwriters<\/b><span style=\"font-weight: 400;\"> if yields exceed comfort levels.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Extending Held-to-Maturity (HTM) Limits:<\/b><span style=\"font-weight: 400;\"> RBI raised the HTM limit to <\/span><b>23% of banks&#8217; deposits<\/b><span style=\"font-weight: 400;\">, insulating them from market depreciation losses.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">If yields rise further, <\/span><b>RBI may extend the timeline to support bond demand.<\/b><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Strengthening the Retail Debt Market:\u00a0 <\/b><span style=\"font-weight: 400;\">RBI\u2019s Retail Direct Scheme encourages direct investment in government securities.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Enhancing awareness and accessibility could broaden the investor base and stabilize yields.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2><span style=\"font-size: 18pt;\"><b>About Stock Market<\/b><\/span><\/h2>\n<ul>\n<li><b>Definition of Stock Market:<\/b><span style=\"font-weight: 400;\"> The stock market is a platform where shares of publicly listed companies are bought and sold.\u00a0<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">It allows investors to trade company stocks and enables businesses to raise capital.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Global Stock Markets:<\/b>\n<ul>\n<li><b>New York Stock Exchange (NYSE):<\/b><span style=\"font-weight: 400;\"> The<\/span><b> world\u2019s largest stock exchange<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li><b>NASDAQ: National Association of Securities Dealers Automated Quotations<\/b><span style=\"font-weight: 400;\">\u00a0 is known for technology stocks <\/span><b>like Apple, Microsoft, and Google.<\/b><\/li>\n<\/ul>\n<\/li>\n<li><b>Indian Stock Markets:<\/b>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Bombay Stock Exchange (BSE)<\/b><span style=\"font-weight: 400;\">: Asia\u2019s oldest stock exchange.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>National Stock Exchange (NSE)<\/b><span style=\"font-weight: 400;\">: India\u2019s largest exchange, home to the NIFTY 50 index.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2><span style=\"font-size: 18pt;\"><b>Impact of Rising Bond Yield in U.S.\u00a0 on Indian Market<\/b><\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Higher Returns with Lower Risk<\/b><span style=\"font-weight: 400;\">: When U.S. bond yields increase, the risk-reward ratio of Indian equities declines<\/span><b>. FIIs and FPIs<\/b><span style=\"font-weight: 400;\"> reduce their equity exposure in emerging markets like India and move funds to safer U.S. bonds.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Stronger U.S. Dollar <\/b><span style=\"font-weight: 400;\">: Rising U.S. bond yields increase demand for the U.S. dollar, strengthening it against other currencies.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">A weaker rupee makes Indian assets less attractive to foreign investors.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>FIIs sell Indian stocks and repatriate their funds<\/b><span style=\"font-weight: 400;\">, further weakening the rupee.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Higher Borrowing Costs for Indian Companies:\u00a0 <\/b><span style=\"font-weight: 400;\">Higher global bond yields lead to increased domestic borrowing rates. Indian companies relying on foreign debt face higher interest costs.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Corporate profitability declines, negatively impacting stock market sentiment.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2><span style=\"font-size: 18pt;\"><b>Relation Between Bond Yield and Stock Market<\/b><\/span><\/h2>\n<ul>\n<li><span style=\"font-weight: 400;\">Stock Markets and Bond Yields Have an <\/span><b>Inverse Correlation<\/b><\/li>\n<li><b>Rising Bond Yields leads to\u00a0 Bearish Stock Market<\/b>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Higher Borrowing Costs for Companies<\/b><span style=\"font-weight: 400;\">: Increased bond yields result in higher interest rates on loans and corporate bonds.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"3\"><span style=\"font-weight: 400;\">Higher borrowing costs reduce corporate profits, leading to a decline in stock prices.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Attractive Fixed-Income Returns:<\/b><span style=\"font-weight: 400;\"> Higher bond yields make bonds more attractive than stocks.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"3\"><span style=\"font-weight: 400;\">Investors shift money from equities to bonds, leading to a stock market sell-off.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Inflationary Pressures:<\/b><span style=\"font-weight: 400;\"> Rising bond yields often reflect higher inflation expectations.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"3\"><span style=\"font-weight: 400;\">Higher inflation erodes future corporate earnings, making stocks less attractive.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Tighter Monetary Policy: <\/b><span style=\"font-weight: 400;\">Rising bond yields suggest central banks (RBI, U.S. Fed) are tightening monetary policy.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"3\"><span style=\"font-weight: 400;\">Higher interest rates slow economic growth, negatively affecting stock market performance.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<li><b>Falling Bond Yields leads to Bullish Stock Market<\/b><\/li>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Lower Borrowing Costs:<\/b><span style=\"font-weight: 400;\"> Lower bond yields reduce interest rates, making borrowing cheaper for businesses.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"3\"><span style=\"font-weight: 400;\">This boosts corporate profits, leading to stock market gains.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Less Attractive Bonds: <\/b><span style=\"font-weight: 400;\">When bond yields fall, bonds provide lower returns.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"3\"><span style=\"font-weight: 400;\">Investors move funds to riskier assets like stocks, increasing demand for equities.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Economic Growth Expectations:<\/b><span style=\"font-weight: 400;\"> Falling bond yields may indicate loose monetary policy, promoting economic expansion.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"3\"><span style=\"font-weight: 400;\">This benefits stock markets by supporting higher earnings and valuations.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<div class=\"vc_table_green\"><\/p>\n<table style=\"width: 99.6375%;\">\n<tbody>\n<tr>\n<td style=\"width: 111.19%; 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