Bonds Fall in Asia as Fed Hikes Still on Table: Markets Wrap

2023-10-03 11:27

Sovereign bonds and shares declined in Asia after hawkish signaling from the Federal Reserve stirred concerns the US

Bonds Fall in Asia as Fed Hikes Still on Table: Markets Wrap

Sovereign bonds and shares declined in Asia after hawkish signaling from the Federal Reserve stirred concerns the US central bank would continue to raise interest rates, intensifying a selloff in Treasuries.

Yields surged across tenors in New Zealand and Australia, with those on Australia’s 10-year reaching the highest since 2011. The moves mirrored the slump in Treasuries after hawkish Fed messaging overtook earlier optimism about the deal to avoid a US government shutdown. Yields on five- to 30-year Treasuries all jumped about 10 basis points Monday, while those on the benchmark 10-year note climbed to the highest since 2007. Treasuries steadied in Asia Tuesday.

An Asian equity benchmark headed for the lowest since November as stocks slumped across the region. Shares also fell at the open in Hong Kong as trading resumed after a holiday. US stock futures were little changed after a volatile session for the S&P 500. China is in the midst of a weeklong holiday.

China Evergrande Group defied the stock markets’ decline, surging as much as 42% as it restarted trading after a halt last week.

The selloff in global bonds gathered momentum as the US shutdown reprieve prompted traders to raise bets on a November rate hike from the Fed to a roughly one-in-three chance, up from the 25% likelihood priced on Friday.

Fed Vice Chair for Supervision Michael Barr said the biggest question before central bankers was how long to leave rates elevated, while known FOMC hawk Michelle Bowman reiterated her call for multiple hikes. Cleveland Fed President Loretta Mester said on Monday the central bank will likely need to raise rates once more this year and then hold them at higher levels for some time to get inflation back to its 2% target.

As long as inflation is still far from target, “the Fed is gonna keep rates high and we are expecting higher rates for longer,” Xi Qiao, managing director for wealth management at UBS, said on Bloomberg Television. “That could be good for the US dollar, but more caution on the equity markets.”

Japan Auction

The dollar gained against most of its Group-of-10 peers after Bloomberg’s dollar index jumped 0.7% Monday. The greenback touched a year-to-date high versus the yen after the Bank of Japan said it would conduct an additional buying operation.

Japan’s Ministry of Finance will auction benchmark 10-year sovereign bonds Tuesday in a test for its debt market. Yields on the 10-year have recently risen to levels unseen since 2013.

Meanwhile, the Reserve Bank of Australia is forecast to leave its policy rate unchanged for a fourth meeting on Tuesday, even as Australian home prices stayed strong in September.

“The RBA board has been on hold over the last three meetings, showing a balanced approach to its achievement of the inflation target after the ‘risk management’ hikes in May and June,” strategists at JPMorgan Chase & Co. including Ben Jarman wrote in a note. “We have viewed the balanced approach as reasonable, but still see scope for one more hike,” which is likely to come in November, they said.

New Zealand’s central bank on Wednesday is also expected to keep rates unchanged 10 days from a general election.

Elsewhere, gold steadied after slipping to the lowest since March. Oil retreated, with West Texas Intermediate dropping below $90 a barrel. A Citigroup Inc. analyst said waning demand from China is poised to to cap the gains from OPEC+ supply cuts.

Key events this week:

China has week-long holiday
Australia rate decision, Tuesday
Atlanta Fed President Raphael Bostic speaks on economic outlook and inflation, Tuesday
US August JOLTS report, Tuesday
New Zealand rate decision, Wednesday
Eurozone services and composite PMIs, Wednesday
ECB President Christine Lagarde gives welcome address at conference, Wednesday
US ISM services index, Wednesday
France industrial production, Thursday
BOE Deputy Governor Ben Broadbent, Riksbank First Deputy Governor Anna Breman participate at panel discussion, Thursday
US trade, initial jobless claims, Thursday
San Francisco Fed President Mary Daly speaks at the Economic Club of New York, Thursday
Germany factory orders, Friday
US unemployment rate, nonfarm payrolls, Friday

Some of the main moves in markets:

Stocks

S&P 500 futures were little changed as of 11:30 a.m. Tokyo time. The S&P 500 was little changed
Nasdaq 100 futures were little changed. The Nasdaq 100 rose 0.8%
Japan’s Topix index fell 1%
Hong Kong’s Hang Seng Index fell 2.9%
Australia’s S&P/ASX 200 Index fell 1.1%

Currencies