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Good Economic News Is Becoming a Double-Edged Sword for Markets

Improving data and the imminent passing of the second-biggest stimulus program in U.S. history has turned optimism about a recovery into fears of an overheating economy.

(Bloomberg) -- A rapid souring in financial markets on Monday highlights how even the most positive news for the world economy is no fillip to risk assets weighed down by the anchor of the global bond market.

Such is their sensitivity to rising Treasury yields, that the weekend approval of a $1.9 trillion U.S. stimulus package and a surge in China’s exports sent U.S. equity futures and other risk-sensitive assets lower. The Turkish lira and South African bonds tumbled while stocks sold off across much of Asia as the 10-year Treasury yield briefly pushed beyond 1.60%.

“Profit taking is not over yet, given that the yield continues rising and investors have become cautious,” said Jackson Wong, Hong Kong-based asset management director at Amber Hill Capital Ltd. “The 10-year bond yield at around 1.6% is not good for asset valuations and there is no prospect that the yield increase will stop in the near-term.”

Improving data and the imminent passing of the second-biggest stimulus program in U.S. history has turned optimism about a recovery into fears of an overheating economy triggering sooner-than-expected rate hikes. The very measures policy makers have been pushing to fight the pandemic are now fueling volatility in bond and equity markets and spurring a rethink of stretched valuations in assets across the world.

“Longer-term yields are likely to stay elevated and possibly so elevated that they cast a nasty pall over risk assets,” said Steven Barrow, head of FX strategy at Standard Bank. “We could see 10-year yields at 2%, or more by the middle of the year”

Man Group Plc has warned emerging-market debt is nearing a tipping point as U.S. yields climb, while BlackRock Inc. said there was no immediate end in sight to a bond selloff that has drawn comparisons with the 2013 taper tantrum.

For Sue Trinh, managing director for global macro strategy at Manulife Investment Management, the key market to watch now is credit, which has remained relatively unshaken amid broad financial conditions that are still easy.

Among the key moves in markets on Monday:

  • Nasdaq futures lost as much a 2.2%; the yield on 10-year Treasuries jumped as much as 5 basis points to 1.61%
  • The Turkish lira fell 1.6%, making it the worst-performing emerging market currency
  • Yields on 10-year South African bonds, a bellwether for risk assets, rose 25bps to 9.5%
  • The Bloomberg Dollar Spot Index reversed losses to trade 0.5% higher, extending last week 0.9% advance

“Momentum is strong in the bond selloff,” said Manulife’s Trinh. “We are in Fed blackout now for the next week and the risk is that momentum takes on a life of its own.”

While the U.S. stimulus package needs to go back to the House for a final vote expected Tuesday, economists are already boosting their forecasts for growth. And though an advance in Treasury yields is often seen as a sign of economic strength, the pace of the move has sparked concern about a disorderly spiral downwards in bond prices.

“A rise of another 50 basis points – toward 2% on the 10-year U.S. Treasury – leaves markets highly vulnerable to correction,” said John Velis, a strategist at BNY Mellon.

--With assistance from Livia Yap, Netty Ismail, Jill Ward and Greg Ritchie.

© 2021 Bloomberg L.P.

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