Asian Stocks Drop as Bond Market Rout Hits Global Markets
October 4, 2023
Asian stocks reached their lowest levels in 11 months on Wednesday as the ongoing bond market rout led to 16-year highs in U.S. Treasury yields. This surge in yields has challenged equity valuations and dampened investor appetite for risk assets across the board.
The spike in Treasury yields also caused the dollar to rise to new heights, with only the yen showing some resilience amid speculation that Japanese authorities might be intervening behind the scenes. The yen briefly breached the 150-per-dollar level before shooting up to 147.3, sparking speculation about possible intervention. However, there has been no confirmation from officials in Tokyo, with Japan’s finance minister and top currency diplomat remaining silent on the matter.
The stronger-than-expected U.S. job openings data further fueled the rise in Treasury yields, pushing the 10-year yield up by nearly a dozen basis points on Tuesday. In Asia, the yield rose an additional four basis points, briefly surpassing 4.85% for the first time since 2007. Even Japan’s 10-year yield, which is typically capped by the Bank of Japan, reached a decade high despite the central bank’s offer to purchase $4.5 billion worth of bonds.
MSCI’s broadest index of Asia-Pacific shares outside Japan dropped by more than 1% for the second consecutive day. The Nikkei in Japan also fell by 1.8%. In addition, S&P 500 futures and European futures declined by 0.3% and 0.2%, respectively.
“With the risk-free rate so high, it’s not really compelling for people to allocate away from short-term cash-like investments,” said Mel Siew, a portfolio manager at Muzinich & Co in Singapore. The S&P 500 registered a 1.4% decline on Tuesday.
The rise in U.S. yields in real terms, when inflation is subtracted, has also attracted money into dollars, as these yields are now at their highest levels in almost 15 years. As a result, emerging market bonds across Asia are under pressure, leading to the depreciation of currencies like the Thai baht, Taiwan dollar, Malaysian ringgit, Indonesian rupiah, and Indian rupee. Some central banks have intervened to mitigate the impact of these market movements.
Meanwhile, the euro and sterling were pushed to their lowest levels in 10 months and seven months, respectively, against the dollar. The Australian dollar and New Zealand dollar also hit 11-month lows. The Australian dollar was pinned near $0.6304, while the New Zealand dollar traded just above a similar milestone after the central bank signaled that interest rates would remain unchanged for the time being.
Analysts suggest that the foreign exchange market is currently in a state of caution, closely monitoring the movements of U.S. Treasury yields and waiting for potential changes.
Federal Reserve officials have so far not expressed concern over rising long-term U.S. Treasury yields.
The stronger dollar has also put pressure on oil prices, causing them to stabilize, while higher yields have weighed on gold prices. Brent crude futures remained steady at $90.87 a barrel, following its peak at $97.69 last week. Spot gold touched a seven-month low at $1,814 an ounce but rebounded slightly to $1,819.
Reporting by Tom Westbrook; Editing by Jamie Freed, Kim Coghill, and Simon Cameron-Moore