Asian shares slump on concerns over rising borrowing costs

Investors watching US Federal Reserve’s Powell for any signs that the central bank is planning to pull back stimulus.

Asian stocks were lower on Thursday led by losses in China and Japan [File: Noriko Hayashi/Bloomberg]

Resurgent worries about rising United States sovereign bond yields hit global shares on Thursday as investors waited to see if Federal Reserve Chair Jerome Powell will address concerns about the risk of a rapid rise in long-term borrowing costs.

The spectre of higher US bond yields also undermined low-yielding, safe-haven assets such as the yen, the Swiss franc and gold. Bond yields rise as their prices fall, as investors reduce their exposure to the relative safety of fixed-income securities in favour of riskier assets such as stocks.

But higher yields also mean borrowing costs increase, which is bad news for anyone holding debt.

The yield on benchmark 10-year US Treasury bonds rose to 1.477 percent, heading back towards a one-year high of 1.614 percent set last week as investors bet on a strong economic recovery helped by government stimulus and progress in vaccination programmes.

“It is not clear how the Fed [Federal Reserve] wants to deal with bond yields,” said Hirokazu Kabeya, the chief global strategist at Daiwa Securities.

“The pace of rises in yields has been far faster than most people have expected and there’s speculation the authorities may be starting to think about tightening their policy.”

Euro Stoxx 50 futures fell 0.9 percent while Britain’s FTSE futures edged down 0.5 percent lower.

The MSCI’s ex-Japan Asian-Pacific shares lost 1.8 percent in early trade while Japan’s Nikkei fell 2.2 percent and China’s CSI 300 index slumped 2.8 percent.

China CSI 300 stock index chart [Bloomberg]

E-mini futures contracts for the US S&P 500 index slipped 0.4 percent while futures for the Nasdaq, the unequivocal leader of the post-pandemic rally, fell 0.7 percent, hitting a two-month low.

Technology shares are vulnerable because their lofty valuations following spectacular gains in 2020 have been supported by expectations of a prolonged period of low-interest rates.

Powell in the spotlight

But the market is laser-focused on Powell, who is due to speak at a Wall Street Journal conference at 12:05pm Eastern US time (17:05 GMT), in what will be his last outing before the US central bank’s policy-making committee convenes March 16-17.

Many Federal Reserve officials have downplayed the rise in Treasury yields in recent days, although Federal Reserve Governor Lael Brainard on Tuesday acknowledged concerns over the possibility that a rapid rise in yields could dampen economic activity.

In addition, anxiety is building over a pending regulatory change in a rule called the supplementary leverage ratio (SLR) which could make it more costly for banks to hold bonds.

“The market is likely to be unstable until this regulation issue will be sorted out,” said Masahiko Loo, a portfolio manager at AllianceBernstein. “There aren’t people who want to catch a falling knife when market volatility is so high.”

In addition, the market will also have to grapple with a huge increase in debt sales after rounds of government stimulus measures to deal with the recession the pandemic triggered.

The issue is not limited to the US, with the 10-year UK Gilts yield jumping back to 0.779 percent, near the 11-month high of 0.836 percent it hit last week, after the government unveiled a big increase in borrowing.

Dollar strength

Currency investors continued to snap up US dollars as they bet on the US economy outshining peers in the developed world in the coming months.

The dollar rose to a seven-month high of 107.16 Japanese yen.

“US dollar/yen has been on a one-way trajectory since the start of 2021,” said Joseph Capurso, the head of international economics at the Commonwealth Bank of Australia.

“The brightening outlook for the world economy is a positive for both US dollar/yen and Australian dollar/yen.”

Other safe-haven currencies were softer, with the Swiss franc flirting with a four-month low against the US dollar and a 20-month trough versus the euro.

Gold hit a nine-month low of $1,702.8 per ounce on Wednesday and last stood at $1,719.

Other top global currencies were little moved, with the euro flat at $1.2054.

Investor hopes of a US economic rebound was unshaken by data released late on Wednesday that showed the US labour market struggling in February, when private payrolls rose less than expected.

Oil prices rose for a second-straight session early on Thursday in Asia. The possibility that the world’s top producers might decide against increasing output at a key meeting later in the day and a drop in US heighten inventories supported prices.

US crude rose 0.6 percent to $61.64 per barrel.

Source: Al Jazeera and news agencies