Markets buckle under bond yield weight

Oct 19 – A sea of red across world stock markets and another surge in US Treasury yields on Wednesday will likely ensure a bearish open in Asia on Thursday, as investors also brace for monetary policy decisions and outlooks from South Korea and Indonesia.

The regional economic data calendar is pretty full too, with the latest trade figures from Japan and Malaysia, and the latest unemployment numbers from Australia and Hong Kong also on tap.

Investors may also deliver a delayed or revised verdict on China’s generally upbeat economic indicators from Wednesday, which included third-quarter year-on-year growth of 4.9%, much stronger than most economists had expected.

Chinese stocks fell sharply on Wednesday, pressured by deepening turmoil in the country’s property sector as top private developer Country Garden flirts with default. Could investors decide if the GDP and other indicators show the economy is in better shape than feared?

Maybe. But the one-two combination of new multi-year highs for US bond yields and a steep selloff on Wall Street looks set to deliver an early blow to Chinese and other markets across Asia on Thursday.

As well as rising bond yields on Wednesday, Wall Street felt the heat from downbeat US earnings. Stocks fell the most in two weeks, even though the message from Fed officials on the stump was that interest rate hikes are probably over.

The selling pressure bearing down on the US bond market simply refuses to relent. The 10-year yield scaled 4.90% for the first time since 2007, and the two-year hit a fresh 17-year high of 5.2440%.

The curve bear steepened again too. The 2s/10s yield curve has steepened 14 out of the last 17 trading sessions, and Wednesday’s move was the biggest in three weeks.

On top of that, oil and gold prices continue to move higher, reflecting investors’ ongoing unease regarding events in the Middle East.

In currencies, the dollar is pressing right up against 150.00 yen. Given how high US yields are moving, it is little wonder – the 2-year US/Japanese yield spread reached 517 basis points on Wednesday, the widest gap in favor of the dollar since December 2000.

Will the Bank of Japan intervene? It stepped into the Japanese Government Bond market on Wednesday to buy bonds and put a cap on the 10-year yield, which had spiked to a new decade high of 0.819%.

The main events on the regional calendar on Thursday will be the policy decisions from Bank of Korea and Bank Indonesia. Both are expected to keep the rate on hold, before easing policy in the second quarter of next year, according to Reuters polls.

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

– South Korea interest rate decision

– Indonesia interest rate decision

– Several Fed officials speak, including Chair Jerome Powell

(By Jamie McGeever; Editing by Josie Kao)