Asia shares shaky as US bond yields hit lowest since late 2017

A man looks at an electronic board showing the Nikkei stock index outside a brokerage in Tokyo. PHOTO: REUTERS

TOKYO (REUTERS) - Asian shares were shaky on Tuesday (March 26) after US Treasury yields sank to their lowest since late 2017, further below short-term interest rates and adding to fears of a US recession.

MSCI's broadest index of Asia-Pacific shares outside Japan was flat in early trade after two days of losses. Japan's Nikkei rebounded 1.1 per cent after a 3.0 per cent fall on Monday.

Wall Street shares were little changed on Monday with the S&P 500 ending with a small loss of 0.08 per cent.

Investors have been spooked by sharp falls in US bond yields and an inversion of the US Treasury yield curve, which is widely seen as an indicator of an economic recession.

The 10-year US Treasury yield dropped to 2.405 per cent , having shed 5 basis points on Monday.

It has fallen more than 20 basis points since the Fed last week ditched projections for raising rates this year and announced the end of its balance sheet reduction, citing signs of an economic slowdown.

The 10-year yield fell below the yield for three-month bills on Friday for the first time since 2007, inverting the yield curve.

San Francisco Fed researchers have said that the difference in those two maturities was the most useful for forecasting a recession.

"I think the market has overreacted to the yield curve inversion because the San Francisco Fed has said it is the most reliable indicator," said Hiroshi Nakamura, senior manager of investment planning at Mitsui Life.

"I expect some correction to the latest rally in bonds. For now we have to see this week's auctions," he said.

The Treasury Department will sell US$113 billion in coupon-bearing supply this week, including US$40 billion in two-year notes on Tuesday, US$41 billion in five-year notes on Wednesday and US$32 billion in seven-year notes on Thursday.

Investors will also be watching Fed policymakers scheduled to speak later on Tuesday.

Fed funds rate futures are now fully factoring in a rate cut later this year, with about an 80 per cent chance of a move priced in by September.

In the currency market, the fall in US yields undermined the US dollar's yield attraction.

The euro stood at US$1.1316, having gained a tad on Monday after Germany's IFO Institute said its business climate index rose to 99.6, beating a consensus forecast of 98.5 and ending six consecutive months of decline.

The dollar was little changed at 110.04 yen, after having hit a 1½-month low of 109.70 on Monday.

The British pound stood at US$1.3211, erasing small gains made after lawmakers voted to wrest control of the Brexit process from Prime Minister Theresa May's government for a day.

May said on Monday there was not yet enough support to put her Brexit deal to a third vote in parliament.

Oil prices hovered below their recent four-month peaks, as the prospect of tighter US crude supply was offset by concerns about a slowdown in global economic growth.

US crude futures traded at US$59.26 per barrel, up 0.5 per cent on day, a tad below Thursday's high of US$60.39, its highest since mid-November.

Brent futures were up 0.3 per cent at US$67.42 a barrel.

Join ST's Telegram channel and get the latest breaking news delivered to you.