US Treasury yields pile pressure on Indian equity valuations

Indian equities are facing fresh headwinds as surging US Treasury yields make government bonds increasingly attractive relative to stocks, compressing valuations across domestic markets. The gap between the Sensex's earnings yield and the US 10-year Treasury yield has turned negative, marking a significant shift in the relative appeal of Indian shares versus safer US debt instruments.

This earnings-to-Treasury spread has contracted to its lowest level in 14 months, signaling that investors can now secure better risk-adjusted returns from American government bonds than from Indian blue-chip equities. The deterioration in this valuation metric reflects the dual pressure on Indian stocks from both external capital flows and shifting global interest rate expectations.

Analysts attribute the strain primarily to the Federal Reserve's hawkish stance, which has driven US bond yields higher and strengthened the dollar globally. This dynamic typically prompts foreign investors to reduce exposure to emerging markets like India, redirecting capital toward safer and more lucrative US assets. The shift comes at a time when Indian equities were already trading at elevated valuations following a strong bull run.

The negative spread suggests that market participants may reassess their positions in Indian stocks, particularly if US yields continue their upward trajectory. Domestic investors are also likely to face renewed pressure as the opportunity cost of holding equities rises. Market participants will be watching closely for any signals of moderation in US inflation and the Fed's policy direction to gauge whether the valuation pressure will ease in coming months.