HONG KONG: Asian equities and currencies sank as a spike in US Treasury yields to levels unseen since 2011 tests investors’ nerves.
The climb in what’s effectively the world’s benchmark risk-free rate is challenging appetites for other assets. The S&P 500 Index pared its gains Wednesday afternoon, and futures fell Thursday as bond yields extended gains.
Stocks slid from Seoul to Hong Kong, though Japanese shares outperformed thanks to the yen’s earlier drop to its weakest against the dollar since November.
The South Korean won and Thai baht led Asian currency declines; India’s rupee is set to test another record low. While China’s markets are shut, the yuan slid past 6.9 per dollar in offshore trading.
Ten-year Japanese government bond yields climbed past 0.15%, toward the upper end of the Bank of Japan’s tolerance zone of plus or minus 0.2%.
With the yen trading weaker than 114 per dollar, there may be less of an incentive for the BOJ to intervene with bond purchases as it has in the past.
Stocks in the US came off their session highs as the sell-off in US government bonds deepened Wednesday in the wake of a stronger-than-expected report on private-sector payrolls.
The rise in yields may be a double-edged sword – it reflects an economy that’s experiencing historically low unemployment and inflation rates broadly in line with the Fed’s target, while it diminishes the relative appeal of dividend income from stocks.
Fed Chairman Jerome Powell said the central bank may eventually boost its benchmark past the neutral level.
US payrolls data on Friday may stoke expectations for rate hikes into 2019, with the jobless rate seen dropping to 3.8%, matching the lowest since 1969.
“This withdrawal of liquidity and gradual tightening of monetary policy” is reverberating across financial markets, Bob Baur, chief global economist at Principal Global Investors, said in an interview with Bloomberg Television in Tokyo Thursday. “We look for 10-year Treasury yields to hit 3.5 at some point – later this year, early next year – and I think that’s going to be a real problem for stock markets.”
Elsewhere, West Texas Intermediate crude oil retreated some after touching the highest level since 2014 this week.
Geopolitical concerns threatened to return as CNN reported that the US Pacific Fleet is drafting plans for a global show of force to warn China and demonstrate resolve to deter Beijing’s military actions, citing several unidentified US defence officials.