Bond slump goes global
A bond sell-off that sent benchmark U.S. Treasury yields to the highest level since 2011 spread into Asia and Europe on Thursday, spurring more gains for the dollar and triggering widespread declines in equities.
As America’s 10-year yield climbed above 3.2 per cent, European government bond rates followed in its path.
The increase in the world’s benchmark yield challenges the appetite for other assets, and futures on the S&P 500 Index duly dropped alongside the Stoxx Europe 600 and the MSCI Asia Pacific gauges.
Emerging-market shares were hit particularly hard.
The higher Treasury yields supported the greenback, and a dollar index rose for a sixth day. South Korea’s won was the worst-performing major currency. While China’s markets are shut, the yuan weakened beyond 6.9 per dollar in offshore trading.
The latest sell-off in U.S. government bonds took hold Wednesday in the wake of stronger-than-expected data on private-sector payrolls and the non-manufacturing sector, which have reaffirmed investor confidence in the American growth story. After U.S. Fed chairman Jerome Powell said the central bank could eventually boost its benchmark past the neutral level, U.S. payrolls data on Friday may stoke expectations for rate hikes into 2019.
The bond slump likely also reflects the growing impact of the world’s major central banks stepping back from stimulus. The ECB this month cut monthly asset purchases in half, while the Fed balance-sheet unwind continues. Meanwhile, resurgent commodity prices are raising the prospect of another tailwind to inflation.
“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.”
In credit, borrowing costs have been advancing amid the Treasury slump. Global investment-grade corporate bond yields rose to the highest since July 2012, Bloomberg index data show. Spreads are so far unaffected, helping keep the primary markets open, with a busy slate of deals being marketed in Europe.
Elsewhere, 10-year Japanese government bond yields climbed past 0.15 per cent, toward the upper end of the Bank of Japan’s tolerance zone of plus or minus 0.2 per cent. West Texas Intermediate crude edged lower after touching the highest level since 2014 this week.