Will rising US Treasury yields lead to more FPI outflows from emerging markets?Here’s what the experts say

U.S. Treasury yields have risen significantly in recent trading due to a variety of factors that have changed expectations about the Federal Reserve’s interest rate cuts.

Robust U.S. retail sales data, combined with unexpectedly high inflation and strong employment data in March, have strengthened the view that the Fed is taking a cautious stance on interest rate cuts in the near term. There is.

As of early 2024, analysts were expecting up to three rate cuts in 2024 from the US Federal Reserve. Given March’s strong retail data and rising inflation, analysts expect the Federal Reserve could hold off on cutting interest rates until July or September. In June.

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Meanwhile, oil prices continue on an upward trajectory, with some market experts predicting that they will rise to $100 per barrel due to escalating tensions in the Middle East, and inflationary pressures are likely to continue in the near future.

As a result, investors are increasingly skeptical about the possibility of a rate cut. Several other factors are currently contributing to the rise in oil prices.

This includes supply cuts by OPEC members and Russia, as well as increased demand from major economies such as the United States and China. This situation has created a huge imbalance between supply and demand in the oil market.

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Meanwhile, U.S. retail data released on Monday rose 0.7% month-on-month in March 2024, according to recent media reports, beating the expected 0.3% rise. This shows that despite borrowing costs being at a 23-year high, consumers are continuing to spend faster than expected.

The yield on the 10-year U.S. Treasury rose 14 basis points to 4.66% in the previous session, its highest level in 2024 and the highest level in five months. So far this month, the 10-year Treasury yield has risen from 4.21% to its current level of 4.65%.

Rising U.S. Treasury yields could prompt investors to reallocate money away from riskier assets, triggering capital outflows from stocks and into higher-yield bonds, market experts say.

This trend may also contribute to foreign institutional investors (FIIs) disinvesting from emerging markets such as India.

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Livemint asked analysts for their thoughts on the potential impact of rising U.S. Treasury yields. Here are their reactions:

Vinit Bolinjkar, Head of Research, Ventura Securities

A rise in US bond yields could lead to an outflow of foreign portfolio investments (FPI) from emerging economies such as India. As U.S. Treasury yields rise, investors can earn higher returns by investing in U.S. bonds compared to emerging market bonds. This could provide an incentive for FPIs to withdraw capital from emerging markets and invest in the US. Rising U.S. Treasury yields may also signal investors are fleeing to safety. This means that during times of economic uncertainty, investors may prefer the relative safety of U.S. bonds over riskier emerging market assets.

However, given the lack of global opportunities and the fact that India is the only big market with significant growth potential, capital is expected to flow back quickly once the market stabilizes.

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Regarding interest rate cuts by the US Federal Reserve, he said, “Following the strong inflation numbers in March, it is unlikely that the US Fed will cut rates in the near future. “It’s about maintaining stability, given the strong inflation numbers.” The next meeting of the Federal Open Market Committee (FOMC), the policy-making body of the US Federal Reserve, is scheduled for May 3-4, 2024. The Fed will closely monitor this meeting for any signals from the Fed regarding future rate hikes. ”

Dr. Joseph Thomas, Principal Researcher, MK Wealth

Rising U.S. bond yields encourage FPI outflows, but inflows into U.S. dollar-denominated assets only occur during the early stages of a U.S. interest rate hike. As it stands, we have already surpassed peak US inflation and peak US interest rates.

At this point, U.S. interest rates are most likely to start falling. US interest rate cuts are being postponed as some inflationary factors persist. Therefore, what is important is the timing of the US rate cut, not the certainty of the rate cut. In such a situation, the possibility of large-scale capital outflows from emerging markets can be ruled out unless geopolitical risks preclude the safe-haven status of the US dollar. Once the US interest rates begin to be cut, we can expect a flow of funds from US dollar-denominated assets into emerging markets.

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Regarding short-term interest rate cuts by the US Federal Reserve, Governor Joseph Thomas said, “Sustained inflation is a factor in the economic slowdown, and the US may face problems with slowing economic growth in the latter stages.” “Therefore, interest rates may need to be cut,” he said. In fact, the Fed held off on raising interest rates, saying the inflation was temporary, despite signs that the economy’s strength might gradually wane. “The Fed may take action on interest rate policy sooner than expected.”

Disclaimer: The opinions and recommendations expressed in this article are those of the individual analysts. They do not represent the views of the Mint. We recommend checking with a certified professional before making any investment decisions.