Inflation, not consumption, will be the main driver for higher US yields: Lakshmi Iyer

"So, up to 5-10 basis points I do not think markets will be disturbed, but a 5% threshold breaching and sustaining will definitely be worrisome which will call for some profit booking in Indian bond markets as well," says Lakshmi Iyer, Kotak Alternate.

So, at what point in time markets would start panicking about the US 10-year movement? Could it be five? Could it be five-and-a-half? What is that pain of threshold for the 10-year now?
Lakshmi Iyer: Well, I would say another 30-40 basis points closer to the 5%, it is a more psychological number. In the near term, markets are kind of taking it in the stride and not getting overtly disturbed about it. But yes, if these yields bump up beyond 5% and nothing really happens beyond that because, mind you, every country which is holding US treasuries, larger ones, are actually net sellers and similar is the case with Japan where 44% of their own government bonds are held by Japanese government themselves.

So, these are going to be the trigger points. So, up to 5-10 basis points I do not think markets will be disturbed, but a 5% threshold breaching and sustaining will definitely be worrisome which will call for some profit booking in Indian bond markets as well.


Split the construct into two for US economy tariff, low growth, short supply means higher inflation, yields will go higher. I can come with another construct which is that a tax cut and surprise resilience in the US economy means consumer demand will come back, that could also lead to yield uptick. So, what will take yields higher? Could it be inflation or could it be consumption?
Lakshmi Iyer: I would say more of inflation because clearly, the consumption does not seem to be coming back in a significant hurry right now and even if that picks up, as you rightly observed, that will stoke inflation further.

However, one cannot completely ignore the housing market in the US, which is clearly showing you the kind of unsold inventory and the kind of price cuts that the US house builders are doing over there and that is clearly pointing to a slightly more sluggish economic growth. So, clearly, there is a case there which is caught between devil and deep sea which will prevent any significantly abrupt movements, north of 5% and if it has to sustain there, then it has to be very-very strong inflationary triggers which we do not really see at this point in time and secondly, as I mentioned to you and you observed that when the yields in dollar terms become less accretive or lucrative for the foreign investor, he or she will actually look up to the pole star in this case which is the US clearly.


Now for our audience what matters is that what will happen to flows. I go back to that same point again which I started with the first question. So, can I say that in the near term as long as dollar remains weak or the dollar index remains weak, the concerns about outflows by institutional investors or by FIIs as we say, it will not come back?
Lakshmi Iyer: Well, the concerns are real, but if you look at a combination of debt plus equity flows, we should still be able to hold forth and therefore, I am not overtly worried or going to get excessively paranoid about a route or a carnage on the rupee front and that is from an investor standpoint, but clearly if you look at just the last year, calendar 2024, 1,35,000 crores odd of net sales positive in Indian fixed income that probably may not repeat in the year 2025.