Bond Rout Keeps Stocks Pinned Down

Bond Rout Keeps Stocks Pinned Down
The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, on Sept. 27, 2023. (Staff/Reuters)

LONDON/SINGAPORE—Stocks fell on Wednesday as an ongoing rout in global bond markets saw U.S. bond yields reach 16-year highs, challenging equity valuations and souring appetite for risk assets as investors bet interest rates will remain persistently high.

European stocks tumbled as much as 0.6 percent before clawing back some ground, with indexes in France and Germany both posting losses. The moves came after Asian shares sank to 11-month lows.

The pain was set to spread to Wall Street, where S&P 500 futures traded down 0.5 percent.

The spike in Treasury yields lifted the dollar to new heights with the yen one of the few currencies showing some fight amid speculation that Japanese authorities might be intervening behind the scenes.

Stronger-than-expected U.S. job openings data had sent the 10-year yield up nearly a dozen basis points (bps) on Tuesday. It rose on Wednesday a further 6.9 bps to 4.872 percent, its highest since 2007. Thirty-year Treasury yields also rose above 5 percent for the first time since August 2007.

European government bonds suffered, too.

Yields on Germany's benchmark 10-year debt rose above 3 percent for the first time since 2011. The country's 30-year yield also climbed to its latest 12-year high.

Even Japan's 10-year yield, which is capped by the Bank of Japan (BOJ), rose 4.5 bps to a decade high despite the BOJ offering to buy $4.5 billion worth of bonds on Wednesday.

"It's a very difficult market," said Sandrine Perret, multi-asset portfolio manager at Unigestion.

"It is all back to yields, that's the main driver of markets. The pivot that most investors were expecting in September has not come yet—that's the big driver of all market pricing at the moment."

The MSCI world equity index, which tracks shares in 47 countries, fell 0.3 percent.

Earlier, MSCI's broadest index of Asia-Pacific shares outside Japan had fallen 1.3 percent, its second straight daily drop of over 1 percent.

Since their move has not come with much of a shift in market gauges of inflation expectations, U.S. yields in real terms —subtracting inflation—are also at almost 15-year highs and are sucking money from all corners into dollars.

"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 Dollar's March

The yen was just on the stronger side of 150 per dollar on Wednesday, after an unexpected but short-lived surge in the previous session stoked speculation that Japanese authorities may have intervened to support the currency.

The Japanese currency had breached the 150-per-dollar level on Tuesday before suddenly shooting to 147.3. There was no confirmation from Tokyo, where Japan's finance minister and top currency diplomat have made no direct comment on the move.

The yen last stood at 149.18 per dollar.

The dollar's march pushed the euro to its lowest in 10 months at $1.0448 overnight and sterling to a seven-month trough at $1.20535.

Both currencies traded near those levels on Wednesday.

"For now, the FX market is a bystander," said SocGen strategist Kit Juckes, "watching Treasuries and waiting for them to break something."

Federal Reserve officials see rising yields on long-term U.S. Treasury debt as not triggering alarm bells yet.

In commodity markets, the stronger dollar has helped put the brakes on oil prices and higher yields have weighed on gold.

Brent crude oil futures were down 51 cents, or 0.6 percent, to $90.40 a barrel at 0611 GMT. U.S. West Texas Intermediate crude fell 60 cents to $88.68 per barrel.

By Tom Wilson and Tom Westbrook
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