Asian markets face uncertainty as Treasuries surge

Asian markets face uncertainty as Treasuries surge

Passersby walk past a electric stock quotation board outside a brokerage in Tokyo.

Jamie McGeever, a look at the day ahead in Asian markets, told Reuters - A look at the day ahead.

If investors needed a reminder that the road to recovery in risk assets will be marked by setbacks along the way, they got it on Wednesday as U.S. bond yields surged to new cycle highs.

The rapid increase in the rapid pace of increase makes sporadic spillovers into other regions and markets almost unavoidable, as Treasury yields are the highest in years.

Punchy UK and Canadian inflation and growing speculation that the Bank of Japan might soon sell Treasuries for yen-supporting FX intervention helped drive the surge in yields that eclipsed solid U.S. earnings and flattened the nascent equity bounce.

The 10 year Treasury yield is up around 260 bps this year, at its current level. That would be its biggest annual rise since at least the 1950s.

The two-year yield's year-to-date rise of 380 bps is on track for its biggest increase since the mid 1970s, even surpassing the 345 bps burst in 1994.

This has a huge impact on Asia -- it tightens financial conditions, makes exchange rates more stable and makes currency supportive intervention more likely, and makes central banks more likely to intervene in the region.

With the yen at a fresh 32 year low near 150 per dollar, all eyes are on the BOJ. It sold around $20 bln to prop up the yen last month, and further action could put downward pressure on Treasuries prices.

China's monetary and FX policies are also under the spotlight. The People's Bank of China is expected to keep benchmark lending rates unchanged for a second consecutive month on Thursday - maybe some relief for the battered property sector, but not for the currency.

The offshore yuan is at a record low against the dollar and the onshore yuan is at its lowest since 2008, and is at its lowest since 2008.

Key developments that could provide more direction to markets on Thursday: