U.S. nominal yields moved up 10 bps on Wednesday night and they are up nearly 40 bps since the start of the year. The main reason behind this move is the sharp rise in inflation expectations in the U.S. It is also worth noting that in this recent move in nominal yields, we have seen some nominal outperformance over breakevens i.e. real yields have moved higher as well. That is important because it tightens monetary conditions.

The U.S. 10 year yield closed at 1.29 percent last night and stands on the cusp of a break-out. On the charts, if it were to take out 1.35-1.39 percent levels - it may be heading higher still.

It is noteworthy that when Fed Vice-chair Clarida spoke recently he noted that he was not concerned with 10-year yields marginally above 1 percent. Now that it is more than marginally higher and real yields are also moving up it would not be unusual to hear from the Fed again.

A rise in real yields acts as a brake on valuations for equity markets. Historically, there is a broad negative correlation between rising real yields and PE multiples for equity markets. Remember, real yields are up only 14 bps so far this year.

(Edited by : Ajay Vaishnav, Abhishek Jha)

First Published:Feb 17, 2021 1:44 PM IST