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Asian Markets Drop as Bond Yields Rise Ahead of Fed

Asia’s share markets were down on Tuesday as two-year US Treasury yields topped 1% for the first time in almost two years, but positive news helped lift property stocks and bonds in China


Asian stock markets
Passersby wearing face masks walk past an electronic board displaying world stock indexes in Tokyo. Photo: Reuters

 

Asia’s share markets turned negative on Tuesday as two-year US Treasury yields topped 1% for the first time in almost two years and investors continued to weigh the risks of a Fed policy rate rise as soon as March.

Meanwhile, oil prices rose to their highest level in more than seven years over concerns about supply shocks after Yemen’s Houthi group attacked the United Arab Emirates.

MSCI’s broadest index of Asia-Pacific shares outside Japan edged higher early in the day by as much as 0.4%, before turning down 0.45% in the afternoon.

Each of the region’s major markets, apart from some Chinese indexes, gave up their earlier gains.

 

Property News Lifts China Blue-Chip Index, Bonds

In Japan, the Nikkei dropped 0.23%, while Australian shares fell 0.11%.

The yen fell after the Bank of Japan said it would stick to its ultra-loose monetary policy.

But in China, the blue chip CSI300 Index bucked the trend to stand 1% higher, while the Shanghai Composite index gained 0.8% to 3,569.91.

The shares of property developers rose after a Chinese lender unveiled a plan to issue debt to fund real estate acquisitions – the first bank to do so, while Beijing sought to reassure investors about the broader impact of defaults on bond markets.

Shanghai Pudong Development Bank said in a filing on Monday it plans to raise 5 billion yuan ($790 million) by selling three-year bonds through China’s interbank market. The funds would be used as loans to buy up real estate projects, it said.

The CSI300 Real Estate Index jumped nearly 5%, on Tuesday morning, while the Hang Seng Mainland Properties Index gained more than 3%.

Dollar bonds of Chinese developers also rebounded following sharp falls in the previous session.

A Country Garden Holdings 2026 bond rose to 70.866 cents on the dollar, up from 64.865 over night, according to data by Duration Finance, after the developer scooped up $10 million of its own bonds on Monday. Its shares jumped 5.3%.

In Hong Kong, the Hang Seng Index swung from a 0.6% gain to trade down 0.42%, while the China Enterprises index lost 0.2% to 8,449.00 points.

The Hang Seng Tech index fell 0.5%, with Tencent Holdings down 2.8% and Alibaba Group Holding off 1.6%.

The Hang Seng Composite index tracking financial stocks was down 0.2% and the Hang Seng Finance index fell 0.3%.

Insurer AIA Group lost 1.1% after Capital Group’s long position in AIA fell to 6.84% from 7.03%.

But mainland developers listed in Hong Kong gained 1.8%, as sentiment was lifted by China’s central bank cutting the borrowing costs of its medium-term loans.

Hong Kong-listed shares of Shimao Group gained 4.1% after it won approval from creditors to extend the payment deadline of a 450 million yuan ($70.86 million) asset-backed security.

 

US Treasury Yields, March Fed Hike Speculation

Elsewhere, the turn in sentiment came after two-year US Treasury yields, a bellwether for rate expectations, rose above 1% for the first time since February 2020. The yields stood at 1.0364% in the afternoon Asian time.

Benchmark 10-year yields gained nearly 6 basis points (bps) to 1.855%.

In early European stock trading, the pan-region Euro Stoxx 50 futures slid 0.38% to 4,276.5, German DAX futures fell 0.22% to 15,893 and FTSE futures were off 0.17% at 7,538.5.

US stock futures, the S&P 500 e-minis, were down 0.47% at 4,633%.

The US Federal Reserve is not expected to change rates at its January 25-26 meeting but a growing number of investors think March will be the start of a tightening cycle.

“Investors’ focus remains on the Fed and the pace at which they raise rates,” John Milroy, adviser at brokerage Ord Minnett in Sydney, said.

“We think it will be faster than markets currently expect. Boom conditions remain in the U.S. with a tight labour market. Good for world growth but adds to the inflationary pressures.”

Elizabeth Tian, Citigroup’s equity derivatives director, said equities markets were reacting to the bond market moves.

“There are fears there are more aggressive and quicker rate hikes by the Fed coming,” she said.

“The Fed is turning more hawkish and there is a lot of focus on that, but we think in the short-term equities market there should be more support because of the value of central bank liquidity that exists now,” she said.

“We’re saying it’s too early because of the liquidity to be too bearish and it should be more of selling into the rally.”

 

Dollar Index Up

Early European markets on Tuesday were also slightly weaker.

The dollar index, which tracks the greenback against a basket of currencies of major trading partners, was up at 95.33.

Brent crude rose to $87.33 per barrel, up 1% and just off a peak hit earlier in the day of $87.55, the highest price since October 2014. US crude ticked up 1.32% to $84.93 a barrel.

An air strike killed about 14 people in a building in the Yemeni capital of Sanaa, residents said on Tuesday, during strikes across the city launched by the Saudi-led coalition fighting the Houthi group.

The alliance strikes on Houthi-held Sanaa followed an attack claimed by the Iran-aligned Houthis on Monday on coalition partner the United Arab Emirates, in Abu Dhabi, in which three people were killed.

The “new geopolitical tension added to ongoing signs of tightness across the market,” ANZ Research analysts said in a note.

Gold was slightly lower. Spot gold traded at $1,817.1642 per ounce.

 

• Reuters with additional editing by Jim Pollard

 

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Jim Pollard

Jim Pollard is an Australian journalist based in Thailand since 1999. He worked for News Ltd papers in Sydney, Perth, London and Melbourne before travelling through SE Asia in the late 90s. He was a senior editor at The Nation for 17+ years and has a family in Bangkok.

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