Bonds steady after US Treasury comes to the rescue

Global bond markets found stability on Thursday following the US Treasury's intervention to curb a decline in its bond market, alleviating investor concerns and causing the dollar to fall while stocks rose. The Treasury revealed plans to double buyback sizes for long-duration debt, aiming to counteract a surge in yields that had driven the 30-year Treasury yield to its highest level since 2007 earlier in the week.

The 30-year yield dipped slightly to 5.1890% in early Asia trade, down 9 basis points from the previous session, while the 10-year yield decreased to 4.6466% after falling 5 basis points on Wednesday. Taylor Nugent, a senior economist at National Australia Bank, remarked that the announcement suggested officials were attentive to pressures on long-term borrowing costs, although it didn't alter the underlying fundamentals.

The move flattened the yield curve overnight. Asian stocks anticipated a weekly increase as worries about US rate hikes diminished. In Tokyo, Japanese government bond yields declined from multi-decade peaks, with the 20-year JGB yield falling 7.5 basis points to 3.700% and the 10-year JGB yield dropping 4.5 basis points. Germany's bund futures and French OAT futures edged higher, signaling lower yields.

Heightened anxiety over mounting government debt triggered a significant bond selloff across the US, Germany, and Japan this week, fueled by substantial AI-related borrowing by tech companies and persistently high oil prices. While the Treasury's announcement temporarily stabilized falling bond prices, market participants believed the support would be short-lived.

Cusson Leung, the chief investment officer at KGI, cautioned that the more the Treasury intervened, the more institutional selling would be stimulated, likening the action to a company conducting a share buyback before raising more capital. Stocks and the dollar reacted positively, with MSCI's Asia-Pacific index and Japan's Nikkei both climbing 1.2%, and Nasdaq futures increasing 0.5% and S&P 500 futures edging 0.16% higher.

The weakening dollar slipped near a two-and-a-half-month low against a basket of currencies at 98.86. EUROSTOXX 50 futures slipped 0.14%. The retreat in yields impacted the dollar, while the euro remained near its highest level since May 29, trading at $1.1674, and the British pound steadied at $1.3600 after rising 0.55% in the previous session.

Federal Reserve minutes released on Wednesday indicated deepening inflation concerns, with several policymakers ready to raise interest rates and many arguing that higher borrowing costs were necessary if inflation did not fall to the central bank's 2% target. The next critical event, according to OCBC analysts, was Fed Chair Kevin Warsh's speech at the Kansas City Fed's Jackson Hole symposium next week.

Until explicit forward guidance emerged, the analysts did not anticipate a notably hawkish message. Commodities also saw slight gains, with Brent crude futures up 0.33% to $91.92 a barrel and US crude futures holding a 1% increase at $85.81 per barrel. Shipping through the Strait of Hormuz slowed, as most shipowners avoided the crucial waterway due to unclear signals about its reopening following the Iran conflict. Gold prices also dipped, falling 0.6% to $4,492.56 an ounce.