NEW YORK/LONDON (Reuters) – U.S. Treasury yields paused their ascent on Monday as oil prices skidded by more than $8 over fears of weaker Chinese demand, while the yen suffered its biggest daily fall since 2020 as Japan’s central bank stood in the way of higher yields.
World stocks were largely flat, holding their ground for now despite expectations that another brutal sell-off in major bond markets is on the cards.
Ten-year U.S. Treasury yields retreated to 2.442% after initially pushing above the 2.5%-marker for the first time since 2019 [US/], while Dutch and Belgian two-year bond yields turned positive for the first time since 2014. [GVD/EUR]
In Japan, a steadfast attempt by the central bank to defend its 0.25% yield cap by vowing to buy an unlimited amount of government bonds for the first four days of the week sent the yen reeling to a six-year low.
By late morning, MSCI’s gauge of stocks across the globe was little changed, down just 0.08%.
The pan-European STOXX 600 index rose 0.29%.
The Japanese yen shed 1.15% versus the greenback to 123.47 per dollar, the highest for the dollar since August 2015 and the biggest one-day rise since March 2020. Yen losses in March surpass 7% and the currency is set for its biggest monthly and quarterly falls since 2016.
Japan should intervene in the currency market or raise rates to defend the yen if it weakens beyond 130 to the dollar, the country’s former top currency diplomat Eisuke Sakakibara said.
A lockdown in China’s financial hub of Shanghai to contain surging COVID-19 cases, meanwhile, weighed on Chinese shares. Oil prices also fell as investors anticipated weaker demand from the world’s second biggest economy.
Weaker energy prices helped lift European stock markets
Risk sentiment was helped by hopes of progress in Russian-Ukranian peace talks due in Turkey this week after President Volodymyr Zelenskiy said Ukraine was prepared to discuss adopting a neutral status as part of a deal.
“Sentiment has been surprisingly resilient in stock markets, which are buying positive headlines from the war in Ukraine,” said Jan von Gerich, chief analyst at Nordea.
“The repricing that continues at the short end of the U.S. yield curve is taking place really fast and without any consequences for Wall Street at the moment.”
Citi last week forecast 275 basis points (bps) of Federal Reserve tightening this year including half-point increases in May, June, July and September.
Expectations that the Fed could push harder and faster to tame inflation drove two-year Treasury yields to their highest levels since early 2019 at 2.41%.
Ten-year yields briefly rose to new highs above 2.5%. And one measure of the U.S. bond yield curve – the gap between five and 30-year Treasury yields – inverted for the first time since 2006 in a sign concerns over growth are growing.
In late morning trade, the 30-year Treasury yield retreated to 2.5314%, from 2.604%, while the 2-year note edged up to 2.3108%, from 2.299%.
“My feeling is the long end of the curve indicates slower growth ahead (rather than recession),” said Mizuho senior economist Colin Asher.
Francois Savary, chief investment officer at Swiss wealth management firm Prime Partners, said portfolio rebalancing ahead of quarter-end helped explained strength in equities in the face of surging bond yields.
“A day of reckoning is coming because at the start of April you have earnings season and you will get a sense of the impact of rising energy prices and guidance for the future,” he said
“I would not bet on the rally continuing in a straight line,” Savary added.
Euro zone bonds continued their move into positive-yield territory, while money market pricing suggested investors were now anticipating 60 bps worth of rate hikes from the European Central Bank by year-end compared with 50 bps last week.
British 10-year bond yields hit their highest levels in six years, Swiss 10-year yields and Australian three-year bond yields rose to their highest levels since 2014.
In commodity markets, gold softened to $1,931 an ounce, down about 1.35%. [GOL/]