Bonds under pressure as global stock rout deepens

Government bonds and globals stocks were under pressure in Asian trading on Friday following a steep sell-off in US treasuries as investors grappled with rising inflation fears.

The yield on the 10-year US Treasury fell 0.03 percentage points in afternoon trading in Asia on Friday to 1.492 per cent. That marked a slight recovery from US trading on Thursday, when the yield shot up as much as 0.23 percentage points to above 1.5 per cent for the first time in over a year. Bond prices rise when yields fall.

In Australia, the yield on 10-year government bonds surged 0.12 percentage points on Friday to 1.849 per cent, its highest level since April 2019.

Selling early in the session in Tokyo had sent yields on Japan’s benchmark 10-year government bond to 0.178 per cent — the highest level since the Bank of Japan announced it would introduce a negative interest rate policy in early 2016. The yield later stabilised at 0.141 per cent.

Bond market nerves were also visible in Asia-Pacific’s equity markets. Japan’s Topix index was down more than 2.4 per cent in afternoon trading, while the S&P/ASX 200 of Australia’s blue-chip shares dropped by more than 2 per cent. Hong Kong’s Hang Seng index shed 2.7 per cent and mainland China’s CSI 300 was down 2.1 per cent.

Japan was just part of the global euphoria, so when [stocks] fall down, they fall down quickly

The volatility on Friday came as concerns grew among investors that the worldwide economic recovery from the Covid-19 pandemic could generate inflationary pressures, causing the US and other central banks to tighten monetary policies.

“With the US economic outlook boosted by pandemic improvement, vaccine distribution and the prospects of President [Joe] Biden’s fiscal package getting through the Congress, investors are now fixated on the risk of inflation and economic overheating,” said Tai Hui, chief Asia market strategist at JPMorgan Asset Management.

Overnight in the US, concerns over inflation rippled through Wall Street. The tech-heavy Nasdaq stock index suffered its worst day since October, falling 3.5 per cent, while the S&P 500 dropped 2.5 per cent. S&P 500 futures were down 0.3 per cent on Friday afternoon in Asia. Those for London’s FTSE 100 fell 1.3 per cent.

Investors’ focus is turning to how central banks will react to surging bond yields and concerns over asset price bubbles.

The Reserve Bank of Australia announced on Friday that it would make an unscheduled A$3bn (US$2.4bn) purchase of three-year government bonds to defend its yield target at that maturity.

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

Concerns are also increasing over central bank independence, with New Zealand’s government this week instructing rate-setters to take red-hot property prices into account when making policy.

Traders in Tokyo speculated that ructions in global markets could push the BOJ to step into bond and stock markets to prevent yields on the 10-year JGB from rising above 0.2 per cent and to support the Topix.

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

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

“They will do it but it won’t make that much difference. Really people are just following what the long- and short-dated US Treasuries are doing,” said Kamai, adding that the recent surge in Japanese equities that took the Nikkei 225 index to 30-year highs had never been driven by a strong domestic catalyst.

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