Floating world of Fixed Income

We've pounded on the table about the importance of the 2018 highs for various risk assets across the globe. It was the point when the market peaked for the stocks, major commodities, and currencies.

Rising rates are a global phenomenon. The US 10yr yield is running into the 300bps level. This level acted as a resistance in 2013 as well as 2018. It's therefore a logical place for the benchmark rate to digest its gains after a vertical move.

The US 10-Year T-Note is finding support at its former 2018 lows ~117'13. A break below this key level will open the target of 103. It's a critical inflection point. We would have to follow the action from here closely to identify the trend here.

A similar rise can be observed in the European 10-year Yields as well. As mentioned, this is a trend that's been in place across the globe.

Coming to India, 10-year Government Bond Yield this week marked a new 3-year high as it hit 7.50%. While rising yield is not a problem for the market, the high rate of change and the presence of extreme historical levels is what spooks the investors.  The next level to track would be 7.66%.

The 10-year bond marked the multi-year low, breaking the former 2014 & 2018 support levels. Here we're looking at the 'clean price' which means that the accrued interest and coupon payments are not considered for the calculation in this index. It only shows the bond's absolute price change, which helps analyze the historical price.

Looking at Nifty 50, weakness will persist until it outperforms the 10-year yield. For that, the ratio will have to move higher. Right now the ratio trading at 52-week lows is definitely not a positive.
Relative to gold, Nifty is still sustaining with overhead pressure.

The Corporate Bond Index vs. India Government bond Index shows the relative strength of the corporate bond. Corporate bonds have a high coupon interest rate with the credit risk of no capital protection, whereas government bonds have a sovereign guarantee. The preference for corporate bonds is a risk-on signal.

Nifty 50 against Government Bond Index and Corporate Bond Index is at critical inflection points of 2018 high. It would be positive for Nifty if the ratios hold above these levels.

To participate in the bond market, Indian investors have multiple options. We will discuss a few of those.
First up is the Reserve Bank of India's Retail Direct platform. It helps in dealing with primary and secondary government issuances. Additionally, many stock market brokers and banks have services to deal with bonds.
Mutual Funds have the option of a Gilt fund, which invests in government bonds. Here investors don't have to deal with direct buying/ selling and taxation. Similarly, there are funds for corporate bonds as well.

We hope this top-down look at the floating world of fixed income helped you understand the rising rates environment.
While there are multiple other scenarios of how rates can impact individual sectors, there is no direct playbook that works every time. Over a period, we see the impact like strength in financial and weakness in tech, etc. But until that happens, the risk-reward for those opportunities gets skewed.

Theoretically, the bubble creation cycle starts with a Shock which forces the credit creation (interest rate reduction) by central banks. This leads to euphoria where every risk asset goes up. Next is a critical stage where central banks have to raise rates to counter inflationary trends, leading to market risk aversion.

As Heraclitus said, "No man ever steps in the same river twice, for it's not the same river, and he's not the same man."
This means that we would never experience the same situation more than once. Every market environment is unique. As humans, we like to see things cyclically. While the past has a lot of information, we get its benefit by using technical analysis. But there are so many factors at play that we cannot expect the same variables and outcomes.

Are you invested in bonds? Did this post help you understand them better?

Thank you for reading, and let us know your thoughts.

AllStarCharts Team.