Government bonds and global equities were under pressure in Asian trading on Friday following a steep sell-off in US Treasuries as investors grappled with growing inflation fears.
The yield on the 10-year US Treasury fell 0.03 percentage point during afternoon trading in Asia to 1.492 percent on Friday. That marked a slight recovery in US trade on Thursday, as yields skyrocketed 0.23 percentage points to above 1.5 percent for the first time in more than a year. Bond prices rise when interest rates fall.
In Australia, the yield on 10-year government bonds rose 0.12 percentage point on Friday to 1.849 percent, the highest level since April 2019.
The sale at the start of the session in Tokyo had brought interest rates on Japan’s 10-year government bond to 0.178 percent – the highest level since the Bank of Japan announced it would introduce a negative interest rate policy in early 2016. The yield later stabilized at 0.141 percent.
Bond market nerves were also visible in Asia Pacific stock markets. Japan’s Topix index fell more than 2.4 percent during afternoon trading, while the S & P / ASX 200 of Australian blue chip stocks fell more than 2 percent. Hong Kong’s Hang Seng index lost 2.7 percent and mainland China’s CSI 300 dropped 2.1 percent.
Friday’s volatility came as investor concerns heightened that the global economic recovery from the Covid-19 pandemic could create inflationary pressures, pushing the US and other central banks to tighten monetary policy.
With the US economic outlook boosted by pandemic improvement, vaccine distribution and the president’s outlook [Joe] Biden’s tax package passing congress has now got investors fixated on the risk of inflation and economic overheating, ” said Tai Hui, chief Asia market strategist at JPMorgan Asset Management.
From one day to the next in the US, inflation concerns rippled through Wall Street. The tech-heavy Nasdaq stock index had its worst day since October, down 3.5 percent, while the S&P 500 was down 2.5 percent. S&P 500 futures fell 0.3 percent in Asia Friday afternoon. Those for the FTSE 100 in London fell 1.3 percent.
Investors are focusing on how central banks will respond to rising bond yields and concerns about asset price bubbles.
The Reserve Bank of Australia announced Friday that it would make an unscheduled purchase of three-year Treasury bonds for A $ 3 billion (US $ 2.4 billion) to defend its return target on that maturity.
Government bond yields have risen sharply in Australia this year, while the local currency is trading at its three-year high against the dollar as the country’s economic recovery after 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 about central bank independence are also growing, with the New Zealand government this week instructing interest payers to factor in scalding hot real estate prices when making policy.
Traders in Tokyo speculated that global market reductions could prompt the BOJ to enter bonds and stock markets to prevent interest rates on the 10-year JGB from rising above 0.2 percent and to support the Topix.
Investors have come to believe the BoJ will act to prevent 10-year JGBs from moving outside a range of about 20 basis points on either side of zero, analysts said.
Takeo Kamai, chief foreclosure services at CLSA Tokyo brokerage, said the drop in the Topix meant it was almost certain that the BOJ would make a major purchase of exchange-traded funds for the first time since January 28.
“They will do it, but it doesn’t matter much. Really people are just following what the US long and short maturity treasuries are doing,” Kamai said, adding that the recent surge in Japanese stocks that the Nikkei 225 index to its highest point in 30 years, was never driven by a strong domestic catalyst.
“Japan was only part of the global euphoria, so when [stocks] they fall down quickly, ”he said.