World Economy

Trump-Fueled Risk Rally Shifts to Japanese Bonds, Euro

Japan’s 10-year bond yield hit its highest since February.Japan’s 10-year bond yield hit its highest since February.

Investors resumed the post-US election trade of selling bonds and buying stocks on Wednesday after a pause earlier this week, albeit less aggressively, with Japan’s 10-year bond yield hitting its highest since February.

The dollar was in demand again too, rising to a one year-high against a basket of currencies as the euro hit a nine-month low of $1.07, and to an eight-year peak against the China’s yuan, Reuters reported.

US President-elect Trump’s plans to cut taxes and boost infrastructure spending would boost economic activity while his proposals to deport illegal immigrants and impose tariffs on cheap imports are seen driving inflation higher.

That prospect has given rise to expectations that US interest rates will rise faster than previously anticipated, boosting the dollar.

As the Bank for International Settlements warned on Tuesday, a stronger dollar poses risks for global markets. But for now, investors are enjoying the ride, meaning stocks and the dollar are in favor at the expense of bonds.

“With 10-year Japanese yields briefly edging back above zero, the market will at some stage focus on whether the Bank of Japan will defend the zero level, especially if the global yield sell-off gathers pace over the coming weeks and months,” Deutsche Bank’s Jim Reid said in a note on Wednesday.

The BoJ announced in September it would cap the benchmark 10-year yield at zero as part of its long-standing battle against deflation and anemic growth.

Japan’s 10-year yield rose to 0.03%, a nine-month high. Comparable US Treasury yields rose 3 basis points to 2.27%, edging back up toward Monday’s 11-month high of 2.302% and up from around 1.86% before the election.

US interest rate futures are pricing in an 85% chance of a rate hike in December, compared to 75% before the election.


In currency market trading on Wednesday, the dollar rose 0.3% against the yen to a five-month high of 109.62 yen and a one-year high of 100.32 on an index basis.

Sharp gains in US bond yields have drawn investors to the dollar, and the dollar index is just 0.5% away from its highest level in more than 13-1/2 years.

The yuan weakened to 6.870 to the dollar, its lowest level since December 2008.

In equities, the FTSEuroFirst index of leading 300 European shares followed Wall Street’s lead from the previous day and was up 0.2%, underpinned by commodity-related stocks.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.2%, bouncing back from a four-month low touched earlier this week, while the yen’s slide toward 110 per dollar helped lift Japan’s Nikkei by 1.1%.

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