Marketmind: Bonds find respite but China crisis festers

A look at the day ahead in U.S. and global markets from Mike Dolan

A rekindled bond market fire storm and simmering China property crisis have dragged world stocks to two-month lows, but the sell-off in Treasuries appeared to ease somewhat on Friday and more credit easing is now expected from Beijing next week.

Perhaps in a circular logic, the jolt to the financial system from a potential Chinese demand shock and a surge in benchmark long-term borrowing rates to their highest in more than a decade is seeing some demand for bonds returning at these yields.

Investors certainly seemed to be buying into the latest rout, with Bank of America (NYSE:) reporting that Treasury funds saw “strong” inflows of $3.9 billion in the latest week, the 27th straight week of inflows and on course for a record inflow year.

But the swingeing losses in what are seen as ‘safe assets’ and how that infects borrowing more widely is unnerving for many, with 30-year U.S. fixed mortgage rates hitting their highest in more than 21 years this week at 7.09%.

The price hit is bruising. Exchange-traded funds invested in Treasury debt of more than a year’s maturity hit their lowest for the year this week, down 2.3% since mid-year and off more than 5% from the 2023 high in early April. Junk bond indices have fallen to their lowest in a month.

Yields backed off somewhat on Friday – with those on the 30-year bond falling back almost 10 basis point from the 12-year high near 4.43% hit yesterday and 10-year real yields ebbing by the same amount from 14-year highs near 2%.

With the Federal Reserve’s annual Jackson Hole conference next week now in focus, there was little respite on Thursday from the week’s red-hot economic soundings and both labour market updates and the Philadelphia Fed’s latest business survey showed brisk activity continued into August.

But equally there was little let-up in the bad news from China’s ailing economy and real estate sector. Embattled developer China Evergrande (HK:) filed for bankruptcy protection in a U.S. court on Thursday as part of one of the world’s biggest debt restructuring exercises – as fears of property market contagion abounded.

China’s securities regulator said on Friday it would cut trading costs, support share buybacks and introduce long-term capital as it unveiled a package of measures aimed at reviving the stock market and boosting investor confidence.

Shanghai stocks fell 1% and Hong Kong lost another 2% on Friday and the weakened again despite Thursday’s attempt by the People’s Bank of China to marshal support for the currency via state banks.

Other Asian bourses and European stocks fell too, with U.S. stock futures also in the red before the open. Emerging market equity indices teetered near two-month lows too.

The dollar was more mixed generally – with Japan’s yen gaining some ground on the U.S. yield retreat but sterling hobbled by weaker-than-forecast UK retail sales data.

Top cryptocurrency bitcoin hit a fresh two-month low on Friday amid a wave of risk averse sentiment and the week’s rise in U.S. real yields.

Events to watch for on Friday:

* U.S. corporate earnings: Palo Alto Networks (NASDAQ:), Deere (NYSE:), Estee Lauder (NYSE:)

* U.S. Treasury auctions 30-year inflation-protected securities

* U.S. President Joe Biden hosts Japan Prime Minister Fumio Kishida and South Korea President Yoon Suk Yeol in a trilateral summit at Camp David

(By Mike Dolan, Editing by Elaine Hardcastle mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)