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Bond rout pushes cash back in to stocks

Asian equities have hit three-week highs as cash fleeing tumbling bond markets flowed back towards big tech and other beaten-up sectors, while the Ukraine conflict’s potential to further hit supplies kept oil and commodity prices high.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.6 per cent, with Hong Kong, Seoul and Sydney all registering similar sized gains.

The index is at its highest since March 4. Japan’s Nikkei jumped 2.5 per cent to touch a two-month top and the moves follow a gain of 1.1 per cent for the S&P 500 and nearly two per cent for the Nasdaq in overnight trade.

Bond markets extended their retreat as investors braced for the Federal Reserve to take an even more aggressive approach to taming inflation.

Two-year Treasury yields are up 76 basis points (bps) in March and 10-year yields are up almost 60 bps to 2.4154 per cent, the highest since 2019.

The selloff, which began months ago, gathered momentum in recent sessions after Fed Chairman Jerome Powell flagged the possibility of bigger-than-usual interest-rate hikes.

As a result, the rates-sensitive yen plumbed six-year lows of 121.41 per US dollar on Wednesday.

“The move higher in yields stretching over the past two weeks has been the largest one since the global financial crisis and even then the moves were within a couple of basis points of what we are experiencing now,” NatWest Markets’ rates strategist Jan Nevruzi said.

“At some point the market might start pricing in an economic downturn, particularly if the Fed embarks on a series of 50 bp hikes.”

For now, investors have been impressed by US economic strength – notwithstanding headwinds from war and inflation – and are wagering that big businesses with good cashflows can hold their own.

“Big tech, with expanding revenue and ability to control costs, is doing well,” George Boubouras at K2 Asset Management in Melbourne said.

Tech behemoths Tencent and Alibaba, and food-delivery giant Meituan led the Hang Seng tech index up by more than three per cent.

Bonds in Asia were kept under pressure on Wednesday though the volume of selling moderated a bit.

Ten-year Australian government bond yields rose 3.5 bps to 2.776 per cent, anchored Japanese 10-year yields edged up to 0.222 per cent, close to testing the Bank of Japan’s 0.25 per cent ceiling.

In currency markets, analysts saw little hope for a reversal in the yen’s fortunes as the policy gap between Japan and the rest of the world was widening and high energy prices were taking a toll on the country’s trade balance.

The yen has lost six per cent in a week against the Australian dollar, which has benefited from soaring prices for Australia’s commodity exports.

A broadly softer US dollar helped the Aussie and New Zealand dollars to their highest against the greenback since last November, with the Australian hitting $US0.7477 and NZ $US0.6973.

The euro held at $US1.1031.

Oil steadied at lofty heights, with Brent crude futures up 0.5 per cent at $US116.13 a barrel and US crude up 0.6 per cent to $US107.23.

Grains remained supported by supply concerns.

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