A rout in government bonds in international markets due to rising inflation fears eased in Asia on Friday, while global stocks continued their retreat.

In early trading in the region, the yield on 10-year US treasuries fell by 0.06 percentage points to 1.456 per cent after it shot up as much as 0.23 percentage points overnight to take it above 1.5 per cent for the first time in over a year. Bond prices rise when yields fall.

In Tokyo, selling early in the session had sent yields on the benchmark 10-year Japan government bond to 0.178 per cent — the highest level since the Bank of Japan (BOJ) announced it would introduce a negative interest rate policy in early 2016. The yield later stabilised at 0.141 per cent.

In Australia, the yield on 10-year government bonds initially surged 0.16 percentage points to 1.885 per cent, its highest level since April 2019. They later steadied at 1.714 per cent, or down 0.01 percentage point.

In Asia-Pacific equity markets, Japan’s Topix index fell more than 2 per cent in the first hour of trading while the S&P/ASX 200 of Australian blue-chip shares dropped 2 per cent. Hong Kong’s Hang Seng index shed 1.9 per cent and mainland China’s CSI 300 was down 1.1 per cent.

The volatility on Friday comes as concerns among investors rise that the worldwide economic recovery from the Covid-19 pandemic could generate inflationary pressures, causing the US and other central banks to tighten monetary policies.

“With the US economic outlook boosted by pandemic improvement, vaccine distribution and the prospects of President [Joe] Biden’s fiscal package getting through the Congress, investors are now fixated on the risk of inflation and economic overheating,” said Tai Hui, chief Asia market strategist at JPMorgan Asset Management.

Overnight in the US, concerns over inflation rippled through Wall Street. The tech-heavy Nasdaq stock index suffered its worst day since October, falling 3.5 per cent, while the S&P 500 dropped 2.5 per cent. S&P 500 futures were up 0.3 per cent on Friday morning in Asia.

Investors’ focus is turning to how central banks will react to surging bond yields and concerns over asset price bubbles.

The Reserve Bank of Australia announced on Friday that it would make an unscheduled purchase of A$3bn ($2.4bn) of three-year government bonds to defend its yield targets.

Meanwhile, traders in Tokyo speculated that ructions in global markets could push the BOJ to step into bond and stock markets to prevent yields on the 10-year JGB rising above 0.2 per cent and to support the Topix.

Takeo Kamai, head of execution services at brokerage CLSA in Tokyo, said the drop in the Topix meant that it was all but certain that the BOJ would make a big purchase of exchange traded funds (ETFs) for the first time since January 28. 

“They will do it but it won’t make that much difference. Really people are just following what the long- and short-dated US treasuries are doing,” said Kamai, adding that the recent surge in Japanese equities that took the Nikkei 225 index to 30-year highs had never been driven by a strong domestic catalyst.

“Japan was just part of the global euphoria, so when [stocks] fall down, they fall down quickly,” he said.

Takenobu Nakashima, a rates strategist at Nomura Securities, said speculation over possible action by the BoJ was focused on the narrow window in which it could act on Friday if it believed that a serious evening sell-off in JGB futures could cause a surge above 0.2 per cent when Tokyo reopens on Monday.

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