Bond selloff pushes Treasury yields to 19-year high, weighing on equities
US Treasury yields climbed to a 19-year high on Tuesday, extending the heaviest monthly bond selloff in two years and dragging on equities in Asia, where investors were also braced for an interest rate rise in Australia.
The benchmark 10-year Treasury yield rose above 5.27% overnight, a gain of nearly 50 basis points through September, with yields rising as bond prices fall. The two-year yield has moved further still, up more than 57 basis points this month to approach 5%, as traders price in three more Federal Reserve rate increases by the middle of next year.
Sovereign yields act as an anchor for global markets, a reference price for riskier assets and a benchmark for mortgages and corporate borrowing, which means higher rates weigh on government, corporate and household budgets. Angus Hui, head of fixed income at Fullerton Fund Management in Singapore, said the way to look at expected returns and overall bond yields going forward was that investors were coming to a new environment. He said interest expenses were increasing as a share of the government budget in a lot of developed markets, stretching sovereign finances and potentially limiting a bond recovery if the global economy slows. "Hence we think bond yields are unlikely to go back to the very good old days when bond yields were very, very low," he said.
In Asia, bond markets in Japan, South Korea and Australia traded under pressure and most regional equity markets slipped. Only a $150 billion boost to a buyback plan by chipmaker Nvidia, which lifted its share price, held the rate-sensitive Nasdaq to a fall of 0.9%. Brent crude futures stood at $106.60 a barrel and climbing, with no sign of a breakthrough in the Middle East, while fragile sentiment towards China's technology sector left the blue-chip CSI300 index pinned to a one-year low after US plans to ban Chinese components from data centres hit stocks on Monday.
Foreign exchange markets were broadly steady through the Asian morning, leaving the dollar headed for a monthly gain. The yen hovered at 157.31 per dollar after rising on Monday, when Japan's top currency diplomat told Reuters that traders ought to heed the signal from Tokyo and Washington's united concern last week over yen weakness. The euro held at $1.1367 and the Australian dollar was steady at $0.7012, with a Reserve Bank of Australia rate rise fully priced, along with another by February. Damien McColough and Uma Choudhury, rates strategists at Westpac, said in a note that they questioned whether the governor could be sufficiently hawkish to frank the market's current mindset, especially if the decision was not unanimous.
