The standoff between central banks and bond traders took center stage in Asia on Friday after Treasury yields surged to a one-year high, forcing policymakers into a slew of debt purchases to calm panicking markets.
The Reserve Bank of Australia waded in with more than $2 billion of unscheduled purchases, while Korea announced buying plans for the next few months. Traders are waiting to see if Japan will act to stop its benchmark yield from breaking out of its target range.
The deepening divide between traders and central banks over the pace of the economic recovery looks set to lead to days of showdown, where policymakers seek to retain control over borrowing costs. The rapid repricing of the reflation trade is rippling through all markets, putting pressure on valuations and hurting government debt auctions.
“Reflation now needs a rein, and central banks are fighting the sharp rise in yields,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “Their credibility is at stake here too — if they want to maintain accommodative policy they have to act if markets look like they’re running away.”
The RBA is taking the lead this time in acting as a breakwater for rising yields, a role typically played by the Bank of Japan in Asia. Its offer to buy A$3 billion ($2.4 billion) of debt acted to cap the selloff, with Australia’s three-year bond yield erasing gains. Treasury yields also came down from the 1.6% highs reached Thursday night as Asian investors piled in.
While the BOJ hasn’t acted yet, Finance Minister Taro Aso fired a warning shot as the benchmark yield surged to within a couple of basis points of the perceived tolerance limit of the central bank. “It’s important that yields don’t suddenly jump up and down,” said Aso in Tokyo. “We need to make sure not to lose the market’s trust with fiscal management.”
The carnage for emerging-markets though continues unabated.
Yields on Indonesian bonds — a bellwether for EM sentiment — surged to levels last seen in October while Bank Indonesia said it will be in the market to guard against a currency sinking fast. The Bank of Korea, which has been restrained in debt purchases, said it will spend up to 7 trillion won ($6.2 billion) to buy bonds in the first half, signaling that it sees a prolonged battle.
While markets are increasingly pricing in higher inflation and the potential for rate hikes, every major central bank from the Federal Reserve to the European Central Bank to the RBA see a prolonged period of easing as economies gradually recover.
There are expectations that global central banks will try to contain a further rise in yields, said Kei Yamazaki, a senior fund manager in Tokyo at Sumitomo Mitsui DS Asset Management. “Fed officials have been tolerating the recent rise in yields, but the current risk-averse market will also prompt them to calm the market verbally.”
Treasury 10-year yields down six basis points to 1.46%Australia’s 3-year yield fell one basis point to 0.12%10-year JGB surged to 0.175%, a level last seen before the BOJ announced negative interest rates in January 2016Indonesia’s benchmark yields are up 12 basis points to 6.68%Spreads on high-grade dollar notes from Asian issuers widened about 3 basis points, the most since April last year.
Stocks in Asia witnessed a broad selloff. The MSCI Asia Pacific Index slumped as much as 2.5%, the most since June, with technology shares being the worst performers. Equity benchmarks in South Korea, China, Taiwan and Japan plunged more than 2% each.
The over-riding question for many investors is the extent of the selloff — many on Wall Street didn’t foresee Treasury yields crossing 1.5% so quickly — as each bout triggers stop-losses and lures short-sellers.
“Selling begets more selling,” said John Pearce, chief investment officer of UniSuper Management Pty. in Sydney. “In the short-term it doesn’t look like it’s stopping.”
For governments, it’s also starting to affect their ability to raise money, with even the U.S. seeing record low demand at its Thursday debt auction. Indonesia has already said it could pare back sales.
“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.”
– Bloomberg