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Bond Yields Hit New Lows - Should You Worry?

Jun 19, 2019

The Indian 10-year benchmark bond yields hit 6.81% at the time of writing this piece. That is a multi-quarter low.

What does this mean for you? More importantly, should you get worried?

Let's take a behavioural approach...

Financial markets are a lot like an autopsy (post mortem). The first principle of forensic surgery is to find the cause and you know the effect. As long as the cause is mathematically obtained, the effect should be accurately deduced as well.

Also, the reason why financial markets move is because of the movement of capital in or out of assets. If you know the fountainhead of the money supply and you know how to track its movements, you have a key to the market direction.

We in India tend to believe equities are the only game in town. How many of us seriously monitor currencies, bond yields, and commodity prices? They all impact our equity portfolios.

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Bonds, like Forex, trade in four decimal points. This means the intraday price mobility is very small.

So to make the same amount of money in bonds, as compared to equities, the bond trader must have an exposure of 15 to 20 times bigger than equities.

The bond market is dominated by institutional players. Their exposure is much larger than retail traders. No wonder, bond markets jostle with commodities for the number two spot in the global turnover metrics, after Forex. Equity is the smallest asset class in the world by turnover.

So far, we have been looking at the market as if the tail wagged the dog. Ideally speaking, shouldn't we first analyse the money supply and then the sentiment in the money markets. If both are positive, then deploy that money in the asset class we are tracking.

If you need to travel from point A to point B by bus, which bus would you rather take? The one that was all fueled up, full of passengers and ready to go. Or the one that was half empty and no sign of when it will depart?

Yet when investing, we often jump the gun and invest for maturity. A longer waiting period is often the result. This is why a 360-degree worldview is important. Track as many indicators as possible, to get a well-rounded view.

Bonds are a good place to start.

If bonds trade at face value, the yield is equivalent to the interest rate (coupon rate). If bonds trade at a premium, the yields fall. Conversely, if the bond prices fall, the yields rise.

As long as bond yields are trading within a comfortable band, the market will remain calm. Disequilibrium results when the yields zoom, or threaten to plunge.

Let's see why...

In the case of the 2012 European Union crisis, the PIIGS nations (Portugal, Iceland, Italy, Greece and Spain) saw global investors dumping government bonds in fear of a default.

Bond prices collapsed and yields hit an unprecedented 30%, 40%, and even 50%. Remember sovereign bonds are IOU's issued and guaranteed by the governments. If you can't trust the nation's economy, who can you trust within that economy?

On the flip side, if the number of alternate avenues of safe investments dry up, people by force tend to buy bonds. Bond prices rise and yields decline. That shows investors are risk averse and would rather keep their money under their pillows, rather than risk it. That's bad news for financial markets.

From a behavioral finance perspective, it's comparatively better to have falling yields rather than soaring yields.

In the case of the former, at least the money is within the country waiting in the wings to be deployed in risky assets when conditions improve.

In the latter case, the capital takes flight and leaves the shores, probably never to return. This puts the economy in a state of shock. Recession becomes a high probability event. There's a remote possibility of deflation too.

All this is possible to know in advance only if your monitor the bond market. Even if you don't trade bonds, it pays to watch this market. It gives you a pulse on the sentiments.

Remember, forewarned is forearmed.

The Indian bond yields hitting 6.81% only indicates that the money still remains within the country.

The only thing that has changed now, is the risk appetite. Instead of equities, money is rushing to the safety of government guarantees, which equity markets don't offer.

Have a profitable day.

Warm regards,


Vijay L Bhambwani
Editor and Research Analyst, Weekly Cash Alerts

Vijay Bhambwani

Vijay L Bhambwani, is the editor of Weekly Cash Alerts and Fast Income Alerts. He is a professional trader, author, trading mentor, and lifelong student of the markets. He has been an active trader since 1986. Financial markets are his life and passion. Everything else in his life revolves around his main objective - trading. Vijay believes that no matter how much a trader has lost in the market, it is possible with hard work and smart work to get it all back over time. Understanding the method behind the madness of the markets interests him more than the profits. He specialises in predictive style of technical analysis, in the commodity, currency, and equity markets. That is the foundation stone of his style of trading - Neuro Behavioural Technical Analysis. Vijay trains other professional traders. He is empaneled with the BSE & NSE as a visiting faculty for various finance market courses. He created the early course content for the Diploma in Commodity Markets (DICM), certified by the Forward Markets Commission. He was a training mentor at the MCX between 2005-2009. He is the first author to have his book - A Traders Guide to Indian Commodity Markets published by CNBC Publishing 18, in 2009 - approved and sponsored by the NCDEX. Vijay has done over 8,000 TV shows in the last 17 years and has written over 4,000 columns/articles in the print and electronic media. He is one of the first columnists to write a weekly column in the English language print media after the commissioning of the MCX, via his columns in the DNA Money, Business Standard and others. Vijay lives with his family in the posh Breach Candy area in Mumbai.

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