US yield spike spooks investors

If the prospect of a soft landing for the US economy had boosted investor sentiment and global risk appetite recently, it is giving way to a deepening sense of caution as investors grapple with spiking US bond yields and a stronger dollar.

It’s not that yields and the dollar are rising solely on the back of increased optimism about the US growth outlook. Worries about Washington’s huge spending and deficits, and the upcoming US election, are also on the rise.

So much so, that the US “term premium” – the extra compensation investors demand for lending to the government over the long term instead of rolling over shorter-term loans – is back. It is the highest in a year.

Add to that the ongoing doubt surrounding China’s economic outlook and the effectiveness of Beijing’s raft of support measures, and Asian investors’ glass right now is looking half empty rather than half full.

If Wall Street is beginning to feel a little heat from the spike in yields, Asian and emerging markets definitely are. Asian stocks are now down five of the last six sessions.

The 10-year US Treasury yield broke above 4.20% on Tuesday for the first time in three months, and the dollar index also climbed to highs last seen on Aug. 2.

If it’s rate and yield differentials fueling the dollar’s gains, the path of least resistance is against the ultra-low yielding Japanese yen. The dollar on Tuesday rose above 151.00 yen for the first time in three months, and the yen is back to being the worst-performing main Asian currency this year.

The weaker yen isn’t offering much support for Japanese equities, though. Foreigners have been buyers in recent weeks but the Nikkei is at a three-week low, suggesting domestic investors are putting their cash overseas.

The Asian calendar on Wednesday is light, with only inflation from Singapore and industrial production figures from Taiwan on deck, leaving investors to focus on global market-moving drivers.

They include the BRICS summit in Kazan, Russia, and IMF and World Bank annual meetings in Washington.

Investors can expect headlines from several policymakers in Washington to hit the tape on Wednesday, including from European Central Bank President Christine Lagarde, Bank of England Governor Andrew Bailey, Bank of Japan Governor Kazuo Ueda, and Reserve Bank of New Zealand Governor Adrian Orr.

The International Monetary Fund on Tuesday published its World Economic Outlook, in which it cut its GDP forecasts for China and Japan. The change in Japan’s outlook, to 0.3% growth from 0.7%, was the biggest downgrade of all major economies, and second only to Mexico’s 0.7 percentage point fall.

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

– Singapore inflation (September)

– Taiwan industrial production

– BOJ Governor Ueda speaks in Washington

(Reporting by Jamie McGeever; Editing by Bill Berkrot)