More central banks may be following the Federal Reserve's hawkish lead, sending bond yields skyrocketing
The global bond selloff spread to Asia on Friday, pushing the yield on Japan's benchmark 10-year government bond to the highest level in more than three months, after Western central bankers this week hinted their economies had strengthened enough to scale back monetary stimulus.
Yields rose broadly across longer-dated Japanese bonds Friday. The benchmark 10-year yield rose to 0.085%--on track for its highest close since March 15. That compares with 0.062% on Thursday and 0.055% a week ago, according to Thomson Reuters data. Bond yields rise as prices fall.
The yield on the 10-year Australian government bond rose to 2.608% on Friday from 2.588% on Thursday, and has surged from 2.387% at the end of last week. Korea's benchmark 10-year yield rose to 2.215% from 2.184% on Thursday, and has advanced from 2.129% last Friday.
Stocks fell across the region after overnight declines in both asset classes, with Japan's alling 1.2% and Australia's S&P/ASX 200 down 1.5%. The dollar was broadly lower against Asian currencies.
Friday's bond-market action is an extension of the wave of selling that European Central Bank President Mario Draghi ignited Tuesday when he hinted the central bank could begin winding down its bond purchases. The selloff continued after comments from central-bank chiefs in the U.K. and Canada indicated they are thinking about raising interest rates.
Read:Central banks set up investors for a long, hard road back to 'normal' (http://www.marketwatch.com/story/investors-face-a-long-hard-road-back-to-normal-2017-06-29)
And see:Here's why the stock market is spooked by central bankers (http://www.marketwatch.com/story/heres-why-the-stock-market-is-spooked-by-central-bankers-trump-agenda-delays-2017-06-29)
Central banks like the ECB, Bank of Japan and Federal Reserve bought massive amounts of bonds as they tried to shore up their economies in the wake of the financial crisis, which helped drive yields to extreme lows. The Fed stopped buying bonds in 2014 and has since started raising short-term rates. The recent remarks from Draghi (http://www.marketwatch.com/story/what-happened-to-mario-draghis-silver-tongue-2017-06-28) and others suggest more central banks might be following suit, leaving investors increasingly on the lookout for clues about the timing of such a shift.
"This [selloff] can escalate if more central banks are sounding hawkish," said Irene Cheung, a senior strategist for Asia at ANZ in Singapore. The Bank of Korea said last week it could adjust its easing stance if the economic recovery continues. The Reserve Bank of Australia is scheduled to meet next Tuesday.
The selloff hit developed-market bonds harder than their emerging-market peers, as those bonds still promise juicy returns that remain appealing to investors. India's 10-year yield, for example, rose to 6.505% from 6.460% last Friday, a smaller advance than the move in Australian yields.
However, the BOJ, a big buyer of bonds, has indicated it isn't in a hurry to exit from its easy-money policies. The Japanese central bank has pledged to keep the yield on 10-year Japanese government bonds near zero, buying as many bonds as it needs to do so; recently, that entailed buying fewer bonds.
It certainly has economic reasons to keep monetary policy loose. Household spending fell 0.1% from a year earlier in May, down for the 15th straight month, according to Japan's Ministry of Internal Affairs and Communications. The central bank's preferred inflation gauge, an index of consumer prices that excludes fresh food and energy, remained flat.
Inflation is a key measure of the success of Prime Minister Shinzo Abe's growth policies aimed at overcoming decades of deflation and getting the economy re-energized through spending and wage increases.
Friday's data curbed some of the selling in Japan, said Shuichi Ohsaki, a rates strategist with Bank of America Merrill Lynch.
Still, the global bond selloff highlights the bind in which the BOJ could find itself if it keep its 0% target for the 10-year yield. A shift toward tighter monetary policy globally could lead to a sustained rally in yields, forcing the Japanese central bank to buy more bonds. That could pose a challenge, as the bank already owns roughly 40% of outstanding government bonds, by its own count, and could eventually run out of bonds to buy.
The BOJ should start talking about tightening its monetary policy given the shift in tone by other central banks, said Naka Matsuzawa, a rates strategist with Nomura Securities in Tokyo.
"I don't think the BOJ can be immune to this change in global trends," he said.
(END) Dow Jones Newswires
June 30, 2017 04:31 ET (08:31 GMT)