Sell-off of bonds and emerging-market currencies resumes

THE DOLLAR hit a four-month high against the yen, and the world’s top bonds and emerging-market currencies were back under pressure yesterday on bets for higher interest rates in a small, but growing, group of major economies.

With the expectations fuelled by increasingly robust-looking global growth, MSCI’s 47-country All World share index was up for a third consecutive day, although it was forced to cling on as Europe’s main bourses faltered.

Treasuries and benchmark European bond yields resumed their march upwards, having paused on Monday, as the focus shifted back to the pace of monetary tightening.

US Federal Reserve chair Janet Yellen starts two days of testimony today as the Fed prepares to unwind the massive hoard of bonds it bought to ease the financial crisis.

Germany’s 10-year yield edged up 2 basis points to 0.56%.

The dollar was higher against most major currencies, including a four-month high of ¥114.43 (R13.55), as traders played the past fortnight’s 25 basis point rise in US government bond yields against the Bank of Japan’s vow to keep its stimulus flowing.

Emerging-market heavyweights were on the ropes. The rand hit a two-month low, and Turkey’s lira and Russia’s rouble both lost almost 1% to trade just off recent respective two-and-a-half month and sixmonth lows.

They have become a new “toxic trio” for traders, having been hammered over the past few weeks despite other major emerging-market currencies, such the Mexican peso, Brazilian real and Polish zloty, all faring well.

“We have been emphasising the fundamental weakness of the South African macro story for some time, and believe market pricing on (the rand) showed a degree of complacency that in part was explained by low G3 bond yields,” Morgan Stanley analysts wrote in a note.

“It comes as no surprise that it is the worst-performing emerging-market currency.” – Reuters