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Explained: Why are US yields falling and how would it impact India and EMs?

Treasury yields had climbed as high as 1.74 percent in April, their highest level in the past year. While rising yields indicate that investors are expecting growth, lower yields point to the opposite. This flattening of the US bond yields curve over the last few weeks has surprised the markets a fair bit, Sameer Goel, Head of Asia Macro Strategy at Deutsche Bank told CNBC-TV18.

US Treasury 10-year yields fell 1.15 percent Monday—its six-month low after data showed the US manufacturing sector expanded at a slower pace in July as compared to the previous month. Investors also eyed the spread of the Delta variant of coronavirus.
The yield on the benchmark 10-year Treasury bill dropped 8 basis points to 1.15 percent. At the same time, the yield on 30-year bonds also dipped 5 basis points to 1.836 percent. Bond yields and prices move in the opposite fashion. When yields increase, prices are bound to drop.
Treasury yields had climbed as high as 1.74 percent in April, their highest level in the past year. While rising yields indicate that investors are expecting growth, lower yields point to the opposite. This flattening of the US bond yields curve over the last few weeks has surprised the markets a fair bit, Sameer Goel, Head of Asia Macro Strategy at Deutsche Bank told CNBC-TV18.
Investors have been worried about the rising spread of the Delta variant hampering the global economic recovery. Stateside, the seven-day average of daily cases reached over 72,000—higher than it was in 2020. When investors doubt the prospects of economic recovery, they flock to safe-haven bonds.
There are also technical factors in play, but majorly it is due to the lack of supply in the treasury markets, Goel said.
“But at the same time, the market is concerned about what our new state of normal would be, beyond covid. Because if you look at the equilibrium level of real rates being priced in the market, they are at the levels before we knew about vaccinations or stimulus in the US. In some sense, the market has become very bearish on the growth prospects,” he argued.
Market expectations since have fallen, as shown in the fall in the US treasuries.
“(Market has become bearish on growth prospects) to the extent that there has been a gap between where the taper happens and when the lift-off does. It is less about the peak cycle move, more about where are long-term real equilibrium rates and where therefore the balance between the savings and investments in the economy will end up being,” Goel added.
The dominating narrative is the idea that a higher level of precautionary savings in this post-COVID world is going to stay. If that happens, our real rates may perpetually stay low, Goel argued.
But how would this impact India and other emerging markets?
Suyash Choudhary, Head of Fixed Income at IDFC AMC said it depends on a set of short-term factors, including demand-supply positioning and COVID-19.
For full interview, watch the accompanying video.