Bloomberg
(Bloomberg) -- The global bond rout that sent benchmark U.S. yields to a one-year high ripped through Asia on Friday, testing the resolve of central banks trying to curb rising market interest rates.The Reserve Bank of Australia waded in with an unscheduled operation after traders pushed yields well above its 0.1% target. Policy makers in South Korea announced plans to buy up $6.2 billion of government bonds by mid year, and investors were on tenterhooks for Japan to follow the RBA after the nation’s key 10-year yield hit a five-year high.The risk of higher borrowing costs derailing an economic recovery from the coronavirus looks set to spur more central banks into action, with emerging markets particularly vulnerable. Currency markets were jolted as well, with the Bloomberg Dollar Index holding gains after a 0.7% rally Thursday. “The spike up in Treasury yields will have major implications across the world whether from bank refinancing to loans,” said Mark Grant, chief global strategist at B. Riley FBR Inc. Central banks are “going to have to increase their balance sheets -- if this blows out, it will change countries’ debt-to-GDPs, their currencies.”Read More: In a Flash, U.S. Yields Hit 1.6%, Wreaking Havoc Across MarketsThe surge in global bond yields showcases a growing divide between bond traders and central banks over the pace of the economic recovery, as markets price in earlier rate hikes with vaccine rollouts and stimulus spending. And as Treasuries extend the rout, the move creates a vicious cycle with investors in mortgage-backed bond markets forced to sell while emerging-markets everywhere see capital flight.“Selling begets more selling basically. In the short-term it doesn’t look like it’s stopping,” said John Pearce, chief investment officer of UniSuper Management Pty. in Sydney. He said U.S. 10-year yields may climb to 2% “before we see some decent two-way trading.”Read More: Convexity Hedging Haunts Markets Already Reeling From Bond RoutThe Australia’s 10-year yield jumped as much as 20 basis points to 1.93%, before easing back to 1.81%. The three-year yield reached 0.15%, the highest level since October, then slid back to 0.13%.“At a minimum, this pace of YCC needs to continue next week and I think the market’s looking for even more,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada. “They want to see that the RBA’s prepared to defend its target and to ensure financial conditions don’t tighten.”New Zealand bonds also slid, with the benchmark 10-year yield up as much as 15 basis points at 2.02%, the highest since 2019. It then came back to 1.96%.Pressure in JapanIn Japan, the world’s second-largest bond market, the benchmark 10-year yield surged to 0.17%, a level last seen just before the BOJ announced negative interest rates in January 2016. It is pushing further toward the edge of the central bank’s perceived range of about 20 basis points on either side of zero.“It’s important that yields don’t suddenly jump up and down,” Japan’s Finance Minister, Taro Aso, told reporters in Tokyo. “We need to make sure not to lose the market’s trust with fiscal management.”He added that “right now we’re not at a stage where we’d say whether the yield levels are appropriate or inappropriate.”While the BOJ didn’t take advantage of a 10:10 a.m. window in Tokyo to conduct an unscheduled operation, investors are still on the lookout for this, as well as the chance of a fixed-rate operation in the afternoon.(Updates with Bank of Korea, rate moves in Australia, Japan)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
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