Bonds lead to losses when interest rate hikes hit; yen in focus

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SYDNEY: Asian equities stumbled into a fourth weekly decline on Friday and bonds saw huge losses as investors tried to catch up with the US Federal Reserve’s interest rate outlook, while currency markets were on edge at the end of a wild week.

Fed members’ forecasts of aggressive hikes and continued high interest rates in the coming year have sparked another round of dollar purchases that have sent other assets to flight.

World shares hit their lowest level in two years on Thursday, falling 3 percent this week. The euro and yen fell to 20-year lows and on Thursday, Japanese authorities entered the market for the first time since 1998 to buy the yen and halt the decline.

The resulting spike has the yen up to 142.20 per dollar and on track for its best week in more than a month and has, for now, put the brakes on broader dollar gains.

In regional markets, the broadest MSCI index of Asia-Pacific stocks outside of Japan fell 0.5 percent to a two-year low. This week, it is down 3 percent. Japan’s Nikkei was closed for a holiday that marks the autumnal equinox.

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Overnight, Wall Street indices fell and longer-dated U.S. Treasuries were dumped — pushing 10-year yields up about 20 basis points to 3.71 percent — as traders spent some time adjusting to the prospect of U.S. interest rates above 4 percent. .

“The 10-year was catching up on the newly calibrated cash interest rate,” said Damien McColough, Westpac’s head of rates strategy, in Sydney.

“If you think the front end will peak at 4.60 percent, can you really hold the 10-year bond yield at 3.70 percent?” he said.

“It’s very skittish price action… I think this short-term volatility will continue in all markets (until) the interest rate market settles down.”

S&P 500 futures were up 0.1 percent and European futures were up 0.4 percent early in the Asia session.

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INTERVENTION

Interest rates are rising sharply almost all over the world, with Britain, Sweden, Switzerland and Norway among the hikers this week, leading to heavy selling in European bond markets, especially government bonds.

But the Fed’s outlook has overshadowed that in the foreign exchange market, as both security flows and higher yields help the greenback, while an energy crisis and war ahead weigh heavily on the euro.

Preliminary production surveys in Europe and Britain’s new finance minister announcing his “Growth Plan” mark the day ahead.

The euro was last at $0.9844, a fraction from Thursday’s 20-year low of $0.9807 – although all eyes are on the yen.

Japan has not disclosed the size or details of its purchase of the yen, but the dollar/yen fell two large legs during trading in Asia and London on Thursday and the risk of another one is likely enough to deter speculators for a while.

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“It changes market dynamics in terms of risk-reward for short-term players,” said UBS strategist James Malcolm.

The Australian and New Zealand dollars have hovered near their lowest levels since mid-2020, with the latest Aussie at $0.6638 and the kiwi at $0.5852.

Sterling was at its lowest point in nearly four decades at $1.1226.

The Chinese yuan, which stood at 7.0964 per dollar in offshore trading Friday, is close to its lowest in more than two years and is close to a record low.

In commodities markets, oil is waiting for a small weekly loss as interest rate hikes worry demand. Brent crude futures hovered at $90.58 in Asia Friday.

No-income gold has suffered from the surge in US yields, most recently holding steady at $1,671 an ounce.

Bitcoin has likewise been battered amid the flight of risky assets and held at $19,322.

(Edited by Sam Holmes)

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