Will rising US bond yields lead to more REIT outflows from emerging markets? here’s what the experts say | Mint – Mint

U.S. Treasury yields have seen a sharp rise in recent sessions, driven by a variety of factors that have shifted expectations for Federal Reserve rate cuts.

Strong U.S. retail sales data, coupled with surprisingly high inflation for March and robust employment numbers, have all contributed to the belief that the Federal Reserve is taking a cautious stance in regarding the reduction of short-term interest rates.

At the start of 2024, analysts predicted up to three rate cuts from the U.S. Federal Reserve for 2024. Given strong retail data and high inflation for March, analysts predict the Federal Reserve may instead postpone rate cuts until July or September. of June.

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At the same time, the continued rise in crude oil prices, with some market experts forecasting a rise to $100 per barrel amid escalating tensions in the Middle East, is likely to fuel inflationary pressures in the near future.

As a result, investors are becoming increasingly skeptical about the possibility of a rate cut. Currently, several other factors are contributing to the surge in crude oil prices.

These include supply cuts from OPEC members and Russia, as well as growing demand from major economies like the United States and China. This situation has led to a significant imbalance between supply and demand in the oil market.

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Meanwhile, U.S. retail trade data, released Monday, jumped 0.7% month-over-month in March 2024, beating forecasts of 0.3%, according to recent media reports. This shows that consumers continued to spend at a faster pace than expected despite borrowing costs at their highest level in 23 years.

Following this, US 10-year bond yields jumped 14 basis points to 4.66% to record the highest level of 2024 in the previous trading session, and this was also the lowest level highest in the last five months. During the current month, the 10-year bond yield rose from 4.21% to the current level of 4.65%.

Rising U.S. bond yields could prompt investors to reallocate funds away from riskier assets, market experts say, potentially triggering capital outflows from stocks to higher-yielding bonds.

This trend could also help encourage foreign institutional investors (FIIs) to divest from emerging markets like India.

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LiveMint asked analysts for their thoughts on the potential impact of rising US bond yields. Here are their responses:

Vinit Bolinjkar, Head of Research, Ventura Securities

Rising US bond yields could lead to foreign portfolio investment (FPI) outflows from emerging markets like India. When U.S. bond yields rise, investors can earn a higher return by investing in U.S. bonds rather than emerging market bonds. This may incentivize REITs to move their money out of emerging markets and invest it in the United States. Rising U.S. bond yields may also indicate a flight to safety by investors. This means that investors may prefer the relative safety of U.S. bonds over riskier emerging market assets during times of economic uncertainty.

However, given that India is the only large market with strong growth potential, due to the lack of opportunities globally, we expect the money to come back quickly when the markets will stabilize.

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Speaking on the US Fed’s rate cuts, he said: “The US Fed is unlikely to cut rates in the near future following the strong inflation data in March. The primary goal of the Federal Reserve is to maintain price stability. , the Fed will likely prioritize raising interest rates to curb inflation over cutting them. The next meeting of the Federal Open Market Committee (FOMC), the governing body of the US Fed, is scheduled for May 3-4, 2024. Investors I will be closely monitoring this meeting for any signals from the Fed regarding future rate increases. »

Dr Joseph Thomas, Head of Research, Emkay Wealth

Rising US bond yields will propel capital outflows from REITs, but only in the early stages of a rise in US rates will there be a flow of funds into US dollar-denominated assets. We are already past peak US inflation and peak US interest rates as things stand.

The highest probability at this point is that US rates will start to fall. Due to the persistence of certain inflationary components, the reduction in American rates is postponed. Therefore, what matters is the timing of US rate cuts and not the certainty of the event. In these circumstances, the likelihood of significant capital outflows from emerging markets may be ruled out, unless the safe-haven status of the US dollar comes into play due to geopolitical risks. As US rate cuts begin to occur, we can expect inflows of US dollar-denominated assets into emerging markets.

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Commenting on the Fed’s short-term rate cuts, Joseph Thomas said: “Persistent inflation is a recipe for an economic slowdown, and the United States could face problems related to slowing economic growth in the stages subsequent periods and, consequently, a reduction in rates. may be necessary during the next quarter. The Fed had, in fact, delayed raising rates, saying inflation was transitory. But the economic reality is exactly the opposite. Despite some signs of a strong economy, which could gradually fade. The Fed could act on its rates sooner than expected.”

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the opinions of Mint. We advise investors to seek advice from certified experts before making any investment decisions.