Above chart includes Sensex closing, 3Y AAA – G-sec spread and 10Y AAA – G-sec spread on a daily basis.
It is very clear that spread and SENSEX have negative correlation. Using last 6years data correlation for SENSEX-3Y and SENSEX-10Y spread comes at ~-0.62 which is quite high.
Reason for SENSEX spike may be due to low cost of funds when the spread is low which in turn increases profitability of companies.
3Y and 10Y spread have cooled off substantially in last few months.
Now thing to note is the level of 3Y and 10Y spread at which today we are is the same when SENSEX was ~near to 20000-21000 levels in 10-11. FII have been pouring money in the economy from last few months. Does this mean they believe that at this spread level Indians are undermining the potential of SENSEX to touch 21000k? Also to note is SENSEX EPS have seen a rise from 10-11 when SENSEX breached 21k.
So equity rally is on the way?
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