Picture two shops on the same street. One sells fixed-rate lockers that pay a guaranteed Rs 7 for every Rs 100 deposited, no questions asked. The other sells a lottery ticket that might pay Rs 15, might pay Rs 2, and might pay nothing. When the locker shop raises its guaranteed payout from Rs 5 to Rs 7, fewer people feel like taking a chance on the lottery ticket next door. That is what happens on Dalal Street every time the bond yield moves up.<\/p>\n
India’s 10-year benchmark government bond yield crossed 7% this week, according to ET Markets, driven by a global debt-market selloff and a rally in oil prices. A quick check on the SIP calculator<\/a> shows how little such jolts dent a long-term plan, but first, here is what a bond yield is and why stocks watch it closely.<\/p>\n A bond yield is the annual return an investor earns from holding a bond, expressed as a percentage of what that bond costs today. It moves opposite to the bond’s price: a cheaper bond makes its fixed interest a larger percentage of the purchase cost, so the yield rises, while a costlier bond makes that same interest a smaller percentage, so the yield falls.<\/p>\n Think of it as a water tank with a fixed tap. A government bond promises a fixed coupon, say Rs 7 a year on a bond originally priced at Rs 100. If demand falls and its market price drops to Rs 95, that same Rs 7 coupon now represents a higher percentage return for a new buyer, so the yield climbs above 7%. Notice that the coupon never changes; only the price paid to receive it does, and that is the entire mechanism.<\/p>\n The stock market cares because the bond yield is the return an investor earns with near-zero risk, and every other investment gets measured against it. A rising government bond yield raises the bar a stock’s expected earnings must clear to look attractive, and that bar is called the discount rate.<\/p>\n When analysts value a company, they estimate its future profits and discount those future rupees back to today’s value using a rate built partly on the risk-free bond yield. Raise the yield from 6.5% to 7%, and the same future profit is worth less in today’s terms, because money promised years from now is compared against a safer option that itself pays more, right now. Yields up, present value of future earnings down, other things being equal.<\/p>\n High-growth, high-PE stocks feel it first, because most of their expected profit sits far out in the future rather than in the current year. A steady FMCG company earning most of its profit this year is less exposed than a young technology firm whose big profit years are supposedly five or seven years away.<\/p>\n This is the same logic as buying fruit on credit. If a shopkeeper promises to deliver a Rs 500 basket of mangoes next year, you would pay less than Rs 500 for that promise today, and even less if a bank deposit nearby now pays a higher rate. Raise the deposit rate, and the mango promise becomes relatively less appealing. Growth stocks are the mango promise; steady, near-term earners are the basket already sitting on the counter.<\/p>\nWhat Exactly Is a Bond Yield?<\/h2>\n
Why Does the Stock Market Care About a Bond Yield?<\/h2>\n
Which Stocks Feel the Pain First When Yields Rise?<\/h2>\n