Bonds decline in Asia after slide in treasuries: markets wrap
Sovereign bonds and shares declined in Asia after hawkish signalling from the Federal Reserve intensified a selloff in Treasuries and fueled a volatile session for the S&P 500.
Yields surged across tenors in New Zealand and Australia, with those on Australia’s 10-year reaching the highest since 2011. The moves mirrored the slump in Treasuries after hawkish Fed messaging overtook earlier optimism about the deal to avoid a US government shutdown. Yields on five- to 30-year Treasuries all jumped about 10 basis points on Monday, while those on the benchmark 10-year note climbed to the highest since 2007. Treasuries steadied in Asia on Tuesday.
An Asian equity benchmark headed for the lowest since November as stocks slumped across the region. Shares also fell at the open in Hong Kong as trading resumed after a holiday. US stock futures were little changed. China is in the midst of a weeklong holiday.
Materials and energy stocks sold off in the region on Tuesday, following drops by those sectors in the US on Monday. China Evergrande defied the decline, surging as much as 42% as it restarted trading after a halt last week.
The selloff in global bonds gathered momentum as the US shutdown reprieve prompted traders to raise bets on a November rate hike from the Fed to a roughly one-in-three chance, up from the 25% likelihood priced on Friday.
Fed vice chair for supervision Michael Barr said the biggest question before central bankers was how long to leave rates elevated, while known FOMC hawk Michelle Bowman reiterated her call for multiple hikes. Cleveland Fed president Loretta Mester said on Monday the central bank will likely need to raise rates once more this year and then hold them at higher levels for some time to get inflation back to its 2% target.
As long as inflation is still far from target, “the Fed is gonna keep rates high and we are expecting higher rates for longer”, Xi Qiao, managing director for wealth management at UBS, said on Bloomberg Television. “That could be good for the US dollar, but more caution on the equity markets.”
The dollar gained against most of its G10 peers after Bloomberg’s dollar index jumped 0.7% on Monday. The greenback touched a year-to-date high versus the yen after the Bank of Japan said it would conduct an additional buying operation.
Japan’s Ministry of Finance will auction benchmark 10-year sovereign bonds on Tuesday in a test for its debt market. Yields on the 10-year have recently risen to levels unseen since 2013.
Meanwhile, the Reserve Bank of Australia is forecast to leave its policy rate unchanged for a fourth meeting on Tuesday, even as Australian home prices stayed strong in September.
“The RBA board has been on hold over the last three meetings, showing a balanced approach to its achievement of the inflation target after the ‘risk management’ hikes in May and June,” strategists at JPMorgan Chase & Co. including Ben Jarman wrote in a note. “We have viewed the balanced approach as reasonable, but still see scope for one more hike,” which is likely to come in November, they said.
New Zealand’s central bank on Wednesday is also expected to keep rates unchanged 10 days from a general election.
Elsewhere, gold steadied after slipping to the lowest since March. Oil retreated, with West Texas Intermediate dropping below $90 a barrel. A Citigroup analyst said waning demand from China is poised to cap the gains from OPEC+ supply cuts.