Bonds take a fresh beating

Mounting fears over rising inflation and interest rates sent US and European bond yields to new highs on Monday, while the yen was set for its biggest daily fall since 2020 as Japan’s central bank stood in the way of higher yields.

World stocks were largely flat, holding their ground in the face of another brutal selloff in major bond markets.

Ten-year US Treasury yields pushed decisively above the 2.5 per cent-marker for the first time since 2019, Dutch and Belgian two-year bond yields turned positive for the first time since 2014 and even Japanese yields defied central bank intervention to hit fresh six-year highs.

As the Bank of Japan reinforced its super-loose monetary policy by offering to buy as many bonds as needed to keep 10-year yields under 0.25 per cent, the yen weakened more than 1.5 per cent against the dollar.

Japan should intervene in the currency market or raise rates to defend the yen if it weakens beyond 130 to the dollar, the country’s former top currency diplomat Eisuke Sakakibara said.

A lockdown in China’s financial hub of Shanghai to contain surging COVID-19 cases meanwhile weighed on Chinese shares . Oil prices also fell as investors anticipated weaker demand from the world’s second biggest economy. Brent crude fell $4.82 to $115.83, while US crude tumbled $5.04 or over 4 per cent to $108.83.

Weaker energy prices helped lift European stock markets , although Japan’s Nikkei lost 0.7 per cent, and US stock futures were mixed .

MSCI’s world stock index was flat,, resilient in the face of a radically more hawkish Federal Reserve and surging bond yields. Risk sentiment was helped by hopes of progress in Russian-Ukranian peace talks due in Turkey this week after President Volodymyr Zelenskiy said Ukraine was prepared to discuss adopting a neutral status as part of a deal.{nL2N2VU0EH]. “Sentiment has been surprisingly resilient in stock markets, which are buying positive headlines from the war in Ukraine,” said Jan von Gerich, chief analyst at Nordea.

“The repricing that continues at the short end of the US yield curve is taking place really fast and without any consequences for Wall Street at the moment.”

Citi last week forecast 275 basis points of Federal Reserve tightening this year including half-point increases in May, June, July and September.

YIELD SURGE

Expectations that the Fed could push harder and faster to tame inflation drove two-year Treasury yields to their highest levels since early 2019 at 2.41 per cent. Ten-year yields also rose to new highs above 2.5 per cent . And one measure of the US bond yield curve – the gap between five and 30-year Treasury yields — inverted for the first time since 2006 in a sign concerns over growth are growing .

“My feeling is the long end of the curve indicates slower growth ahead (rather than recession),” said Mizuho senior economist Colin Asher.

Francois Savary, chief investment officer at Swiss wealth management firm Prime Partners, said portfolio rebalancing ahead of quarter-end helped explained strength in equities in the face of surging bond yields.