(Bloomberg) — A rapid souring in financial markets on Monday highlights how even the most positive news for the world economy is no fillip to risk assets weighed down by the anchor of the global bond market.
Such is their sensitivity to rising Treasury yields, the weekend approval of a $1.9 trillion U.S. stimulus package and data showing a surge in China’s exports sent stocks and equity futures lower Monday. Other risk-sensitive assets from the Korean won to Indonesian bonds retreated, and technology shares underperformed as the 10-year Treasury yield edged back up toward 1.60%.
“Profit taking is not over yet, given that the yield continues rising and investors have become cautious,” said Jackson Wong, Hong Kong-based asset management director at Amber Hill Capital Ltd. “The 10-year bond yield at around 1.6% is not good for asset valuations and there is no prospect that the yield increase will stop in the near-term.”
Improving data and the imminent passing of the second-biggest stimulus program in U.S. history has turned optimism about a recovery into fears of an overheating economy triggering sooner-than-expected rate hikes. The very measures policy makers have been pushing to fight the pandemic are now fueling volatility in bond and equity markets and spurring a rethink of stretched valuations in assets across the world.
“The near-term risk is that we see 10-year yields continuing to push higher toward 2%,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group in in Singapore. “That will see a further adjustment in asset prices that had previously benefited from low yields.”
Man Group Plc has warned emerging-market debt is nearing a tipping point as U.S. yields climb, while BlackRock Inc. said there was no immediate end in sight to a bond selloff that has drawn comparisons with the 2013 taper tantrum.
For Sue Trinh, managing director for global macro strategy at Manulife Investment Management, the key market to watch now is credit, which has remained relatively unshaken amid broad financial conditions that are still easy.
Among the key moves in markets on Monday:
The MSCI Asia Pacific Index lost 0.7%, falling for a third-straight sessionKorea’s won dropped to the weakest since NovemberYields on 10-year Indonesian bonds, a bellwether for Asian risk assets, jumped 15 basis points to 6.84% — the highest since OctoberThe Bloomberg Dollar Spot Index reversed losses to trade 0.1% higher, extending last week 0.9% advance
While the U.S. stimulus package needs to go back to the House for a final vote expected Tuesday, economists are already boosting their forecasts for growth. And though an advance in Treasury yields is often seen as a sign of economic strength, the pace of the move has sparked concern about a disorderly spiral downwards in bond prices.
“Momentum is strong in the bond selloff,” said Manulife’s Trinh. “We are in Fed blackout now for the next week and the risk is that momentum takes on a life of its own.”
(Rewrites throughout)
For more articles like this, please visit us at bloomberg.com
Subscribe now to stay ahead with the most trusted business news source.
©2021 Bloomberg L.P.
