Stock Market · Currency, Commodity & GSec

Bond yields & what they signal

Bond yields are more than just interest rates on a piece of paper. They are one of the most important real-time signals about economic expectations, more reliable than many equity indicators.

What yield tells you

The 10-year G-Sec yield encodes the market's collective forecast of:

• Future inflation
• Future RBI rate policy
• Government fiscal deficit
• Global capital flows

> If 10-year yield is 7.2%, the market expects average inflation + risk premium to compound at ~7.2% over a decade. If inflation falls, the yield should also fall.

Yield as equity signal

The Equity Risk Premium (ERP) = Nifty earnings yield minus 10-year G-Sec yield.

Nifty P/E at 20× → earnings yield = 5%. If 10-year yield is 7.2%, ERP = -2.2%.

Negative ERP means bonds offer better risk-adjusted return than equities → markets are expensive → correction risk.

Rising yields and stock markets

When yields rise sharply:

• Debt funds suffer (bond prices fall).
• High P/E growth stocks suffer most (future earnings discounted at higher rate).
• Banks benefit (lending rates rise, NIMs expand).
• Utilities and REITs suffer (high dividend yields lose appeal vs bond yields).

Real yields

Real yield = nominal yield − inflation.

If 10-year yield = 7% and CPI inflation = 5%, real yield = 2%.

Positive real yields attract foreign investors into G-Secs → Rupee strengthens.

Takeaway. The 10-year G-Sec yield is the most important interest rate signal. It drives equity valuations, mutual fund returns, and currency flows. When yields spike, growth stocks fall hardest. Always watch yields alongside equity valuations.