US Treasury yields flared up on Thursday as bond markets fretted over the Federal Reserve’s willingness to let inflation spike.

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The US Federal Reserve had a day earlier maintained overnight interest rates near zero even though it expects growth and inflation to rise in the coming months. While the yields stabilized immediately after the announcement, they shot up on Thursday.

The 10-year Treasury yield rose from 1.64 percent late on Wednesday to 1.7 percent on Thursday — a 14-month high.

The rise in yields shows the bond market is not particularly happy with Fed — a stark contrast with stock market indices, which reversed their earlier losses and rallied strongly.

Usually, stock and bond prices move in tandem. High bond prices mean lower yields or lower interest rates, which is good for companies’ earnings. Conversely, low bond prices mean higher yields, which increases borrowing costs for companies.

With bond yields at a 14-month high, investors are now beginning to wonder if stocks will be able to sustain their valuations in face of headwinds to earnings.

Shares of technology companies and other high-growth stocks shed their previous gains. Nasdaq lost 3 percent, and S&P 500 lost 1.5 percent, whereas DJIA lost half a percent.

Higher yields make borrowing costs expensive for businesses, so investors give up overvalued growth stocks and load up on shares that may benefit from the economic rebound.

What does it mean for the Indian markets?

US bond yields are the ultimate barometer of risk worldwide, Jeff Chowdhry of RLC Ventures told CNBC-TV18 in an interview. If the yields are going up, people become cautious, and FIIs become cautious.

"In a scenario where yields are going up, they sell growth stocks, they sell emerging markets, and they sell India," he said.

"So, I am afraid my view is the same as it was a month ago, that US bond yields would continue to go up despite what the Fed Chairman said. As a result, one should be cautious in this environment, not necessarily on a daily view, but certainly on a view of 3-6 months one should be very cautious of the market,” he said

India has seen inflation rise in the recent months, and the real policy rates are below long-run average levels. This makes India prone to external shocks, S&P Global said.

“Real policy rates are below long-run average levels, eroding the return buffers. Capital may be quicker to leave, and central banks may have to raise policy rates," it said.

However, India's current accounts are stronger relative to the normal levels, so that's one mitigating factor.

RBI had lowered policy rates by 250 points since Jan '19. And given the weak recovery, chances of increment are nominal. However, S&P expects the stimulus-led recovery lifting yields in the US to affect the financial conditions of Asian emerging markets and growth less than during the “taper tantrum" of 2013.

(Edited by : Abhishek Jha)

First Published:Mar 19, 2021 5:52 PM IST