(Bloomberg) — The relentless rise in U.S. Treasury yields continued to send waves through global markets Monday, at the start of a key week for inflation watchers.
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Ten-year yields climbed through 2.75% for the first time since March 2019 as investors priced in the impact of the Federal Reserve’s tightening plan and accelerating inflation. The move pushed the greenback higher, the yen through the 125 per dollar level and erased the more than decade long premium benchmark Chinese bonds held over their U.S. counterparts. Most stocks fell.
“A move this profound from a corner of markets that has such pervasive effects — from pricing of credit to the determination of ‘risk free returns’ is a cause for major risk re-pricing, one would suspect,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. “I think the impact of such sustained and strong moves in Treasury yields will be hard to dodge for anyone.”
Global investors are still adjusting to an increasingly hawkish Fed, which last week added aggressive quantitative tightening proposals to its plan for a rapid increase in interest rates to cap surging inflation. That threatens to remove a key support for global risk assets, already under pressure from fears the central bank action could trigger a recession in the world’s largest economy.
“Fed tightening is the single biggest theme in global markets right now,” said Andrew Ticehurst, a rates strategist at Nomura Holdings Inc. in Sydney. “Yields are making fresh highs, so we are likely seeing stops and technical trading contributing to this move.”
The bond selloff is spilling into stocks, with high-priced technology shares feeling the brunt of the pressure as the rise in real yields threatens valuations. The benchmark inflation-adjusted yield climbed about eight basis points to minus 0.11% Monday, not far off a break into positive territory for the first time in two years.
That has led to a shift away from the riskiest corners of the market into more defensive names. Last week saw U.S. health-care stocks climb to all-time highs, while speculative funds built up record bets against emerging-market shares.
“If today’s inflation and fiscal concerns fester, the great diversification benefit provided by Treasury bonds to equity investors the last 25 years by usually rallying when equities sharply sold-off could be lost,” wrote David Bianco, Chief Investment Officer, Americas, at DWS. “We think the next 5% price move for the S&P 500 is likely to be down given slowing earnings growth, elevated inflation and numerous Fed hikes likely pressuring the price/earnings ratio.”
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In Asia, the yield spread between Chinese 10-year bonds and Treasuries fell below zero to the lowest since June 2010. The vanishing premium — which comes as Beijing sticks to an easing stance unlike policy makers across the Pacific — is likely to dampen the appeal of Chinese assets including the yuan.
Stocks in China slumped as mounting concern over a Covid outbreak at home and the rise in yields added to persistent regulatory headwinds.
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Meanwhile, the dollar-yen looked set to climb toward the 130 level, thanks to the widening yield gap between the U.S. and Japan. The pair rose to its highest since 2015 on Monday.
“Dollar-yen looks vulnerable to a move toward 130 if U.S. bond yields continue to push higher and the Bank of Japan remains committed to keeping the 10-year yield at 0.25%,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore. “This would put more pressure on other Asian currencies as well.”
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Key for global markets this week is U.S. consumer price data, as the war in Ukraine, now into a seventh week, amplifies price pressures. Economists expect an 8.4% gain in March’s index from a year earlier, a fresh four-decade high.
“It looks like another test of nerves all round, with a confluence of growth concerns, a more aggressive Fed and high inflation from supply disruptions,” said Wai Ho Leong, strategist at Modular Asset Management.
(Updates yen move in eleventh paragraph.)
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