The U.S. 10-year treasury yield on Thursday reached its highest in 10 months, underpinned by fears that U.S. interest rates might stay higher for longer, contributing, along with China’s economic woes, to world stocks languishing at five-week lows.
Benchmark 10-year yields reached 4.312% on Thursday, testing October’s 4.338% a break past which would be its highest in 16 years.
“The reason behind the rise is the strong data the U.S. domestic demand. The minutes (from the Fed’s July meeting, released Wednesday), feel really dated, they are talking about a gradual slowdown in the U.S. economy, but when you look at the data we are not even in a slowdown,” said Samy Chaar, chief economist at Lombard Odier.
Those minutes showed policy makers were divided over the need for more interest rate increases, with some citing the risk to the economy of pushing hikes too far.
U.S. retail sales data came out strong earlier this week, and traders are also watching the Atlanta Federal Reserve’s GDPNow forecast model, which, showed the U.S. economy is likely to be growing at a 5.8% annualised rate in the third quarter.
Expectations for U.S. peak rates have not changed significantly, however, instead the changes in yields have been driven by changes in medium term rate expectations.
“What’s interesting is usually when you have volatility around rates that’s the market trying to price in a higher fed funds rate, what’s happening here is the market is pricing out cuts, or at least delaying them till later,” said Chaar.
“The impact of higher yields is standard: a dollar that is well supported and equities under pressure,” he added.
MSCI’s world index was down 0.18% on Wednesday at its lowest level since Jul 6.
Europe’s broad STOXX 600 fell 0.3%, with the Dutch benchmark standing out, down 1.12% after a 22% fall in payments firm Adyen whose first half earnings missed estimates.
The world share sell off could pause in the U.S., however, with Nasdaq and S&P500 share futures up around 0.2%.
CHINA WOES
China’s economy was the other topic on investors’ minds as a series of economic data and ructions in the property sector have laid bare the stuttering post-pandemic recovery.
The latest development was embattled asset manager Zhongzhi Enterprise Group saying it will conduct a debt restructuring, a further sign of turmoil in China’s $3 trillion shadow banking sector.
MSCI’s broadest index of Asia-Pacific shares outside Japan slid its lowest since late November in early trading Thursday. The index down is about 8% for August and set for its worst monthly performance since September 2022.
Hong Kong and onshore Chinese share benchmarks steadied somewhat, albeit at multi-month lows, as investors pin their hope on possible government stimulus to boost the sputtering economy.
“I still think that there will be more action coming from policymakers,” Herald van der Linde, chief Asia equity strategist at HSBC, told the Reuters Global Markets Forum. “It just takes a bit of time.”
Van der Linde said the appetite to invest in China is very low. “And that appetite has to do with confidence, and that won’t change too quickly. It would be good if we would get some stimulus for consumers.”
In currency markets, the dollar index , which measures the U.S. currency against six rivals, scaled a two-month peak of 103.59 underpinned by higher U.S. yields.
The Japanese yen touched a nine-month low of 146.57 per dollar earlier in the session, with traders keeping a vigil on possible intervention chatter from Japanese officials.
Finance Minister Shunichi Suzuki said on Tuesday authorities were not targeting absolute currency levels for intervention.
In commodities, oil prices steadied after three sessions of declines. U.S. crude rose 0.21% to $79.55 per barrel and Brent was at $83.82, up 0.44% on the day.
The spike in rates has weighed on non-yielding gold, which touched a five-month low on Thursday. The metal was last $1,89 an ounce, having dropped to as low as $1,888.30.
