Global bond rout deepens, stirring slowdown fears

NEW YORK: A rout in government bond markets deepened on Wednesday with benchmark U.S. yields hitting fresh 16-year highs as investors bet persistently high interest rates will slow world growth and dampen the appetite for riskier assets. A cooler-than-expected U.S. private payrolls report initially helped stocks on Wall Street rebound from the prior day's sharp sell-off, but concerns about the impact of rising rates turned stocks lower on Wall Street and in Europe.

Growth concerns also weighed on crude oil and gold prices. The yield on 10-year Treasury notes touched 4.884%, its highest since August 2007, while 30-year Treasury yields rose above 5% for the first time since the same month 16 years ago.

"The stock market's going to absolutely take its cue from the bond market over the next week or so," said Rhys Williams, chief strategist at Sprouting Rock Asset Management in Bryn Mawr, Pennsylvania. "If bonds stabilize or even improve, then stocks are OK and we should have a seasonally strong period." The ADP National Employment Report showed U.S. private employers in September added the fewest workers in more than 2-1/2 years, with private payrolls rising by 89,000 jobs. Economists polled by Reuters had forecast payrolls would rise by 153,000.

The report eased the outlook after a stronger-than-expected U.S. job openings report on Tuesday increased fears of even tighter monetary policy to curb a resilient U.S. economy. "ADP is the canary in the coal mine that things are slowing," said Williams. "The upcoming job reports are going to be less robust than the previous few months."

MSCI's gauge of stocks across the globe shed 0.20% and the pan-European STOXX 600 index lost 0.42%. The Dow Jones Industrial Average fell 0.09% and the S&P 500 gained 0.13% but the Nasdaq Composite added 0.61%.

European bonds followed the U.S. rout, with yields on Germany's benchmark 10-year debt rising above 3% for the first time since 2011, before slipping to 2.968%. The country's 30-year yield climbed to its latest 12-year high. Even Japan's 10-year yield, which is capped by the Bank of Japan (BOJ), rose 4.5 bps to a decade high despite the BOJ offering to buy $4.5 billion worth of bonds on Wednesday.

Australian, Canadian and British government bond yields have also surged this week. The moves in bond markets sucked money into the U.S. dollar, which was stronger than the euro. The dollar index, a measure of the U.S. currency against a basket of other currencies, eased 0.13%.

Earlier, MSCI's broadest index of Asia-Pacific shares outside Japan sank to 11-month lows, shedding 1.1% for its second straight daily drop of over 1%. U.S. yields in real terms - subtracting inflation - are also at almost 15-year highs, in part because their move has not come with much of a shift in market gauges of inflation expectations.

THE DOLLAR'S MARCH

The yen was on the stronger side of 150 per dollar on Wednesday, after an unexpected but short-lived surge in the previous session stoked speculation that Japanese authorities may have intervened to support the currency.

The Japanese currency had breached the 150-per-dollar level on Tuesday before suddenly shooting to 147.3. There was no confirmation from Tokyo, where Japan's finance minister and top currency diplomat have made no direct comment on the move. The yen last stood at 149.10 per dollar.

The dollar's march pushed the euro to its lowest in 10 months at $1.0448 overnight and sterling to a seven-month trough at $1.20535. The euro last traded at $1.05, up 0.3% on the day. The pound was up a similar amount at $1.212.

"For now, the FX market is a bystander," said SocGen strategist Kit Juckes, "watching Treasuries and waiting for them to break something." Federal Reserve officials see rising yields on long-term U.S. Treasury debt as not triggering alarm bells yet.

In commodity markets, the firm dollar has helped put the brakes on oil prices and higher yields have weighed on gold. U.S. crude recently fell 3.62% to $86.00 per barrel and Brent was at $87.69, down 3.55% on the day.

Spot gold was flat at $1,822.69 an ounce.