Bonds rally in Asia as crude recovery continues after Fed rate rise

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US Treasury notes rallied in Asia trading on Thursday as emerging markets gained on a weakening dollar and crude oil prices continued to rise in the wake of the US Federal Reserve’s decision to raise interest rates.

From 2.54 per cent just after the Fed decision – and 2.58 per cent earlier in the US day – the 10-year Treasury yielded 2.489 per cent as the Asian trading day got fully underway, its lowest level in more than a week. The two-year yield dropped from 2.40 per cent ahead of the Fed news to 1.299 per cent by mid-morning in Asia.

Andrea Iannelli, investment director at Fidelity International, said:

With no big change today, and a gentle path ahead for Fed Funds, the short term outlook remains bullish for risky assets, including credit, and for US Treasuries, particularly given the very skewed positioning in the latter.

Yield on sovereign bonds, which moves inversely to price, fell across the board in the Asia Pacific region. The 10-year Australian government note saw yield down 11 basis points to 2.801 per cent, followed by a 10bp drop by the equivalent New Zealand note to 3.236 per cent. Japanese government bonds were less volatile, with yield on the 10-year note inching down just 1bp to 0.072 per cent in morning trading.

Emerging markets currencies gained broadly against a softer greenback. The dollar index measuring the latter against a basket of peers was down another 0.2 per cent on top of Wednesdays’ fall of 0.9 per cent to put it at 100.52, the lowest level in a month.

South Korea’s won led regional gains with a rise of 1.1 per cent against the dollar to Won1,131.43 on Thursday, bringing it 1.6 per cent stronger over the two-day period. The Taiwanese dollar ranked second with a climb of 0.6 per cent to TW$30.639 against the greenback on top of a 0.5 per cent strengthening the previous day.

Major regional currencies were less volatile. After gaining 2 per cent on Wednesday the Australian dollar shed 0.3 per cent against its US counterpart to $0.7686. Japan’s yen was virtually flat at ¥113.38 per dollar in Asia morning trade, steady after breaking back below the ¥114 level the day prior to close 1.2 per cent stronger.

Some currencies outside the region were paring previous gains, with the South African rand weakening 0.6 per cent to 12.8621 per dollar following a nearly 3 per cent gain on Wednesday. The pound was 0.2 per cent softer at $1.2268 after ending the previous session 1.1 per cent higher and back above the $1.22 mark for the first time in just over a week.

The Mexican peso was holding steady at 19.2231 per dollar after closing out Wednesday 2.3 per cent stronger, putting it at the strongest level since .

Oil prices built further on Wednesday’s gains. Data on Wednesday from the Energy Information Administration had showed that total US crude stocks last week declined for the first time this year, as imports slowed. However, inventories at the Cushing, Oklahoma delivery hub rose by more than expected.

Brent crude, the international benchmark, rose 0.7 per cent to $52.16 a barrel, back above $52 for the first time since Friday and effectively erasing losses from earlier in the week. West Texas Intermediate, the US marker, rose 0.6 per cent to $49.14, which combined with Wednesday’s 2.4 per cent rise put it above its Monday open.

Gold edged up another 0.4 per cent to $1,224.55 per ounce, taking it 2.1 per cent higher over two days.

Asia Pacific stock markets were struggling to match gains on Wall Street, where the S&P 500 ended 0.8 per cent higher at 2,385, having been up 0.4 per cent just before the US rate news. The move left the benchmark index just 0.4 per cent below the record closing high it reached at the start of this month.

Hong Kong’s Hang Seng index climbed 1.2 per cent as energy stocks jumped 2.6 per cent and telecoms stocks rose 1.4 per cent. State-owned Chinese oil firms China Petroleum rose 2.6 per cent while PetroChina climbed 3 per cent, both bouncing back from the previous day’s drops.

Tokyo’s benchmark Topix index was off 0.1 per cent, climbing back from a sharp fall at the open thanks to gains of 1 per cent by energy stocks. That was offset by falls in the financials and consumer staples segments of around 0.6 per cent.

In Sydney the S&P/ASX 200 index was up 0.2 per cent, driven higher by a 2.2 per cent rise in materials stocks and a climb of 1.2 per cent by energy stocks. Shares in mining heavy Rio Tinto rose 3 per cent while rival BHP Billiton climbed 2.8 per cent.

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