A global government-bond selloff rolled into Asia on Friday after a two-day breather, putting the yield on Japan's benchmark 10-year government bond more firmly in positive territory.
The yield on Japan's 10-year government bond rose to 0.035% on Friday, the highest level since mid-February, compared with 0.005% late Thursday, according to Quick Corp. The yield remained in positive territory through an entire day of trading for the first time since Feb. 18 on Thursday. Yields rise as prices fall.
Yields across the region marched higher, with the yield on Singapore's 10-year government bond trading at 2.364% on Friday afternoon in Asia compared with 2.234% late Thursday and the yield on a similar bond in New Zealand rising to 3.11% from 3.015%. Yields also rose in emerging-market sovereign bonds, including in Malaysia, Thailand and South Korea.
The pressure follows a fresh round of selling in U.S. Treasurys overnight, after the release of strong housing and employment data in the U.S. The yield on the 10-year U.S. Treasury note settled at 2.278%, its highest close since late December, which wiped out its tumble over the course of this year.
Donald Trump's policy mix of infrastructure spending and tax cuts has fueled expectations of stronger growth and rising inflation. That has sparked a rash of selling in government bonds since the election, as inflation chips away at the future value of fixed payments, posing a big threat to long-term government debt.
The selling paused earlier this week after data showed that U.S. business prices and industrial production were flat in October.
Broadly, the rise in inflation expectations has also triggered concerns that the Federal Reserve could raise interest rates more aggressively than expected, investors and analysts say. Fed Chairwoman Janet Yellen said on Thursday that an increase in short-term interest rates "could well become appropriate relatively soon."
The prospect of higher rates in the U.S. has caused a headache for investors in emerging markets. With higher yields in developed markets, investors there have less incentive to park their cash in riskier assets, such as emerging-market debt, and might choose to keep their money closer to home.
"Like most, we are expecting another Fed hike in December," said Leong Lin Jing, an investment manager at Aberdeen Asset Management in Singapore. "Till then, you will have more headwinds to come for emerging marketsand the Asian bloc." She added that the coming OPEC meeting at the end of the month and the Italian referendum on constitutional changes in early December could introduce more uncertainty.
The most vulnerable markets are those with high ownership of foreign debt, such as Indonesia and Malaysia. Foreigners have sold $1 billion of Indonesian debt in the week after Mr. Trump's election, according to the Institute of International Finance. That compares with year-to-date inflows of $7.8 billion.
The resulting surge in the U.S. dollar also poses a burden to emerging-market companies and governments with dollar debt, which becomes harder to pay off as local currencies weaken. The WSJ Dollar Index, which measures the U.S. currency against 16 others, reached its highest closing level since February.
"Before the election, our preferred asset class [globally] was corporate dollar debt," said Daniel Morris, an investment strategist at BNP Paribas Investment Partners in London. "Now that calculation has changed a bit. The big variable now is how far the dollar goes," he said, adding that he has become cautious on emerging-market debt.
A too-rapid rise in the dollar, however, could end up slowing the Fed's intended pace of rate increases, giving emerging markets a bit of a break.
"Given the dollar-strength environment, the market will be doing the [Fed's] work for them, which would eventually slow down the trajectory of policy of rate hikes," Aberdeen's Ms. Leong said.
In Japan, the rise in yields challenges the Bank of Japan's new policy to keep the yield on 10-year government bonds near zero.
Yields are also broadly higher for longer-dated Japanese government bonds, with yields on the newest 20-year tenor up 0.035 percentage point at 0.475% and the newest 30-year up 0.035 percentage point at 0.595%. Selling is highest with the 40-year bond, up 0.04 percentage point at 0.71%.
On Thursday, the Bank of Japan offered to buy an unlimited amount of Japanese government bonds at fixed rates for the first time since introducing so-called yield-curve control. The move signals that the central bank intends to step in to keep yields from rising too far.
Some Japanese bond investors are migrating to equities, as the yen continues to weaken against the dollar, which has given a lift to Japanese stocks.
"Private insurance and pension portfolios are poised to become more structural buyers of Japanese equities in coming months as the BOJ's 'zero upper bound' policy gains credibility" among investors," wrote Jesper Koll, chief executive of asset manager WisdomTree Japan in a note.
The yen fell 0.5% against the dollar on Friday, and Japan's Nikkei rose 0.6%.
Suryatapa Bhattacharya contributed to this article.
Write to Rachel Rosenthal at Rachel.Rosenthal@wsj.com
(END) Dow Jones Newswires
November 18, 2016 04:15 ET (09:15 GMT)
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