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Asian Stocks Down, Bond Selloff Enters “More Lethal Phase”

·2-min read

By Gina Lee – Asia Pacific stocks were down Friday morning, with global bonds starting to stabilize from an aggressive selloff that drove steep losses in U.S. shares.

Japan’s Nikkei 225 slid 2.29% by 10:11 PM ET (3:11 AM GMT) and South Korea’s KOSPI slumped 2.67%. In Australia, the ASX 200 fell 1.88%.

Hong Kong’s Hang Seng Index slid 2.18%. The city expects its first batch of the Pfizer Inc. (NYSE:PFE)/ BioNTech SE COVID-19 vaccine on Saturday.

China’s Shanghai Composite fell 1.62% while the Shenzhen Component was down 1.31%.

The selloff saw Benchmark Treasury yields plunge back below 1.5% as the Asian session opened on Friday, after the ten-year Treasury yield rose as much as 23 basis points to 1.6% overnight. The surge gathered pace as holders of mortgage securities being forced to offload government bonds.

The ten-year U.S. yield adjusted for inflation climbed to its highest level since June 2020 and sounded a warning for riskier assets that benefitted from the ultra-easy monetary policy brought on by COVID-19.

“The fixed income rout is shifting into a more lethal phase for risky assets … the rise in yields has long been mostly seen as a story of improving growth expectations, if anything padding risky assets, but the overnight move notably included a steep lift in real rates and a bringing forward of the U.S. Federal Reserve’s lift-off expectations,” Westpac head of rates strategy Damien McColough told Reuters.

As hopes for a global economic recovery from COVID-19 continue to grow, investors are shifting from COVID-19 era winners to those poised to benefit from an end to lockdowns. However, crowd-pleaser GameStop Corp . (NYSE:GME) saw its shares double at one point during the previous session before ending 19% higher.

Investors continue to bet on that recovery, but some are increasingly worried that rising inflation could see central banks withdraw their monetary policy support. The worries continued even as the Fed stressed that there are no plans to tighten policy prematurely and that the rise in Treasury yields reflect optimism.

“It’s all about interest rates … tech has been a relative outperformer. As it led on the way up, it will likely lead on the way down too,” Schwab Center for Financial Research vice president of trading and derivatives Randy Frederick told Bloomberg.

Earlier in the week, Fed Chairman Jerome Powell reassured investors that the central bank would continue its ultra-easy monetary policy and would overlook the short-term rise in inflation in his testimonies before Congress earlier in the week. However, the market has almost fully priced in a first-rate hike by the end of 2022.

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