Five alive: US yield curve nears historic level

Oct 20 – Another watershed day for US Treasuries on Thursday – the entire curve came within a whisker of trading above 5% – is set to weigh heavily on Asian market sentiment on Friday and potentially seal one of the biggest weekly losses for regional stocks in months.

The gloomy end to the week comes as investors also await inflation figures from Japan, Malaysia, and Hong Kong; remarks from Bank of Japan governor Kazuo Ueda; and an interest rate decision from China.

The People’s Bank of China is widely expected to leave its one- and five-year loan prime rates unchanged at 3.45% and 4.20%, respectively. But after Bank Indonesia’s shock rate hike on Thursday, traders won’t be taking anything for granted.

But market sentiment and direction across Asia on Friday will be driven by the dramatic repricing of the US bond market that shows no sign of cooling. If anything, it is heating up by the day.

The US 10-year yield has shot up 35 basis points this week, on track for its biggest weekly rise in over a decade. The 2s/10s yield curve has steepened 27 basis points, which would be the biggest weekly steepening move since March.

There are plenty of cross-currents flowing through markets right now – mixed US earnings, war in the Middle East and spiking oil prices, and another debacle on Capitol Hill as US lawmakers again failed to elect a House speaker.

But the catalyst for Thursday’s volatility was remarks by Federal Reserve Chair Jerome Powell, who said signs of above-trend growth or a too-strong labor market could warrant more monetary tightening.

Wall Street – which had earlier in the day traded higher on strong US jobs data and Netflix earnings – quickly flipped as bond yields leaped higher. The 10-year yield rose as high as 4.996%, a level not seen since July 2007.

The MSCI Asia ex-Japan index is already down more than 2% so far this week. Given the extent of Wall Street’s slide on Thursday and potential event risk from the Middle East over the weekend, it is almost certain to end the week at a new low for the year.

On the economic data front, data are expected to show Japan’s annual core inflation rate was 2.7% in September, cooling from 3.1% in August. That would be the lowest inflation since July last year.

The BOJ will scrutinize the data at its next policy meeting on Oct. 30 to 31, when policymakers are expected to raise their inflation outlook, potentially signaling another step towards exiting years of ultra-easy monetary policy.

Yen traders, with dollar/yen stuck up near 150.00, will be paying close attention too.

Here are key developments that could provide more direction to markets on Friday:

– China interest rate decision

– Japan inflation (September)

– BOJ governor Ueda speaks

(By Jamie McGeever; Editing by Josie Kao)