A synchronized rise in global bond yields is sending tremors through equity markets, creating a tug-of-war between stock investors and central bankers. On Tuesday, yield pressure that began in the U.S. spilled over globally, following comments from Bank of Japan Governor Kazuo Ueda. Ueda’s indication that the central bank might raise its benchmark rate this month caused yields on longer-term Treasurys to climb, prompting a sell-off in expensive assets.
When bonds pay higher yields, they become an attractive alternative to riskier investments like stocks and cryptocurrencies. This dynamic was evident as Bitcoin shed roughly 6% overnight, trading around $86,650. The allure of “risk-free” returns from bonds undercut the valuations of high-flying assets, contributing to the S&P 500 breaking its winning streak and the Dow Jones Industrial Average dropping nearly 1%.
Despite the pressure from the bond market, Asian equities showed resilience. Tokyo’s Nikkei 225 managed a 0.5% gain, and Hong Kong’s Hang Seng rose 0.7%. Analysts suggest that while the prospect of tighter monetary policy in Japan is shaking bond markets, regional equity markets may be strong enough to weather the storm. “We suspect they could nonetheless weather further tightening,” noted Thomas Mathews of Capital Markets.
In the U.S., the economic picture is complicated by a softening manufacturing sector. Reports from the Institute for Supply Management reveal that factories are struggling with supply chain uncertainty and are hesitant to hire. This puts the Federal Reserve in a difficult position: they are expected to cut rates next week to aid the job market, even as their Japanese counterparts look to raise them to combat inflation.
The diverging paths of the Federal Reserve and the Bank of Japan are creating a complex landscape for currency traders as well. The dollar rose to 155.61 yen on Tuesday, reflecting these shifting expectations. As central banks adjust their strategies, volatility in both bond yields and stock prices is likely to remain the dominant theme for the remainder of the month.