Why the heck 10 year US bond yields matter ?
Explaining it to a 16 year old middle school kid.
Around two decades ago, when I was a newcomer in the stock market, I found myself questioning the significance of *US 10 year bond yields*.
In this article, I'll attempt to simplify it for a 16-year-old with average intelligence.
The explanation is with respect to Indian markets but is true all over the world.
Picture this: You’re in charge of XYZ Investment Fund and have INR 10,000 crore to invest. You can either dive into the unpredictable Indian markets or opt for the secure route with the top-notch finance option - the US Government.
Given the substantial amount, even a small percentage difference matters. For instance, 1% of 10,000 crore amounts to 100 crore. Since this 10,000 crore comes from hundreds of individuals, you’re accountable to them for your choice. You could take the riskier path and invest in the Indian markets, potentially getting an average return of 12/13%, or you could choose US bonds, which currently offer an almost guaranteed 5% return.
A quick look back:
During Covid, the US Government injected money into the markets to encourage people to stay at home. However, this led to increased inflation. Consequently, the US Government is now trying to withdraw money from the system by raising the Yield rate.
The increase in yield rate impacts the money in the system due to the Risk/Reward decision we talked about earlier. It’s a choice between a guaranteed 5% return or a potentially uncertain 12% return. And always remember, the fund sizes are in the billions.
So when US Yields go up, money all over the world tends to flow towards them. Between the choppy world of equities — the placid Debt waters are better. That’s why the markets all over the world are redder.
Picture this: The popular student at school invites you for a date where you’ll cover the expenses. Versus — an ordinary student asks you out and offers to foot the bill. But this ordinary kid has horrible table manners and may embarass you during the dine out
§ Now, regarding the relationship between US Bond yield and Dollar rates:
When you invest in US Yields, you need US Dollars instead of Indian Rupees (INR). This demand for USD is more. This leads to the weakening of the INR.
§ Lastly, let’s consider the connection between US Bond yield and Gold rates:
Another option for low-risk investment is Gold. However, higher bond yields can negatively impact Gold rates,as like Gold they are now a good investment option, which is why the Gold rates are struggling.
While all this pans out — the threat of credit defaults say in Credit Card loans or Home loans or Car loans increases as the money increasingly becomes costlier.
To add to the mix the Crude Oil also plays a role in your investment decisions.
But that’s for some other time😋
Hope you found this useful.
