Bonds under pressure as global stock market rout intensifies

Government bonds and global equities came under pressure in Asian markets on Friday following a sharp selloff in U.S. Treasuries as investors grapple with rising inflation fears.

The 10-year US Treasury yield fell 0.03 percentage point in Asian afternoon trading on Friday to 1.492%. That marked a slight rebound against US trade on Thursday, when the yield climbed 0.23 percentage points to over 1.5% for the first time in over a year. Bond prices rise when yields fall.

In Australia, the 10-year government bond yield jumped 0.12 percentage point on Friday to 1.849%, its highest level since April 2019.

The sell-off at the start of the session in Tokyo had pushed the yields on benchmark 10-year Japan government bonds to 0.178% – the highest level since the Bank of Japan announced it would introduce a policy negative interest rates at the start of 2016. The yield subsequently stabilized at 0.141. percent.

The nerves of the bond market were also visible in the Asia-Pacific stock markets. Japan’s Topix index fell more than 2.4% in afternoon trading, while the S & P / ASX 200 for blue-chip stocks in Australia fell more than 2%. Hong Kong’s Hang Seng Index fell 2.7% and mainland China’s CSI 300 fell 2.1%.

Friday’s volatility came as investors feared the global economic recovery from the Covid-19 pandemic would generate inflationary pressures, which prompted the United States and other central banks to tighten monetary policies.

“With the US economic outlook boosted by the improvement in the pandemic, vaccine distribution and the President’s outlook [Joe] With Biden’s tax package passing through Congress, investors are now obsessed with the risk of inflation and economic overheating, ”said Tai Hui, chief Asian market strategist at JPMorgan Asset Management.

Overnight in the United States, worries about inflation invaded Wall Street. The highly technological Nasdaq stock index suffered worst day since October, down 3.5 percent, while the S&P 500 fell 2.5 percent. S&P 500 futures were down 0.3% on Friday afternoon in Asia. Those of London’s FTSE 100 fell 1.3%.

Investors focus on how central banks will react surging bond yields and concerns about asset price bubbles.

The Reserve Bank of Australia said on Friday that it would make an unplanned AU $ 3 billion (US $ 2.4 billion) purchase of three-year government bonds to defend its return target at this deadline.

Government bond yields have risen sharply in Australia this year, as the local currency trades at a three-year high against the dollar as the country’s economic recovery from Covid-19 accelerates. “At some point, this could become a problem for the economic recovery and the prices of other assets,” said David Plank, an economist at ANZ.

Concerns are also growing over central bank independence, with the New Zealand government this week educate those who set rates need to take scorching property prices into account when making policy.

Tokyo traders speculated that annuities in global markets could push the BOJ to enter bond and stock markets to keep 10-year JGB yields from exceeding 0.2% and to support the Topix.

Investors have come to believe that the BoJ will act to prevent 10-year JGBs from breaking out of a range of around 20 basis points on either side of zero, analysts said.

Takeo Kamai, head of execution services at brokerage firm CLSA in Tokyo, said the drop in the Topix meant it was almost certain that the BOJ would make a big purchase of exchange-traded funds for the first time since January 28.

“They will, but it won’t make a lot of difference. In reality, people are just following what long and short term US Treasuries are doing, ”Kamai said, adding that the recent surge in Japanese stocks which drove the Nikkei 225 index to 30-year peaks had never been motivated by a powerful national catalyst.

“Japan was just part of the global euphoria, so when [stocks] fall, they fall quickly, ”he said.

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