Markets skid on high yields, rising caseload

MUMBAI: Markets plunged on Thursday as soaring US bond yields added to jitters over a looming second wave of coronavirus infections in the country.

The BSE Sensex fell 585.10 points, or 1.17%, to close at 49,216.52, while the Nifty shed 163.45 points, or 1.11%, to 14,557.85.

The US Federal Reserve continued to project near-zero interest rates at least through 2023 and raised the US economic growth estimate to 6.5% this year, reflecting its greater optimism about recovery from Covid-19; however, the US 10-year Treasury yield rose to 1.74%, the highest since January 22.

The rise in US bond yields erased stock gains earlier in the day, said Vinod Nair, head of research at Geojit Financial Services. “Dovish comments from the Fed chief on the strong economic bounce back and continuation of its accommodative stance could not cool off US bond yields. Indian markets witnessed higher volatility compared to global peers as domestic investors turned extra cautious on increasing Covid-19 cases in India,” he said.

The correction has brought down valuations to attractive levels in some pockets, said Gaurav Dua, senior vice-president and head of capital market strategy at Sharekhan by BNP Paribas. “The sentiments were affected adversely by the sudden firming up of the bond yields in the US, along with another day of a surge in new Covid cases to 38,500, the highest in the past four months in India. The clubbing of initial public offerings in the already tight advance taxpayment season also seems to have added to the underperformance by Indian markets as compared to its global peers,” Dua said.

Markets in the rest of the

Asia-Pacific were broadly higher, while Europe was mixed. Markets in Japan, South Korea, Hang Seng and China were up 0.5-1%. Germany outperformed other markets in Europe, hitting a record high on Thursday.

The Fed indicated that it will separately look at the increase in bond yields and will not taper any quantitative easing (QE) programmes to cool off the debt market. Chairman Jerome Powell said something will be announced in the coming days.

Subhankar Sanyal, an economist at Centrum Broking, said the most likely outcome might be an update on the supplemental leverage ratio, which was put in place at the start of the pandemic to encourage big banks to lend and support bonds and short-term funding markets.

“The likely move will be to extend this exemption as removal of this cushion will make the banks sell Treasuries and push the yields higher. The Fed will face a hard time to contain the yields, especially at the longer end of the curve as nominal economic growth rate increases and business cycle accelerates,” Sanyal added.

The steady flow of foreign money into Indian equities is expected to continue as the US central bank is not likely to change interest rates soon.

The BSE Sensex fell 1.17% to close at 49,216.52.