Asian Buyers Scarce as Key US Yield Curve Remains Inverted

Asian traders are taking their cues from the activity in the U.S. Treasury markets. Their primary focus is on the long-term 30-year Treasury bond yield and the inverted 2-year/10-year Treasury note spread.
James Hyerczyk
Japanese Stock Market

The major Asia Pacific stock indexes are mostly lower on Thursday with the Australian market bucking the trend. Volatility is relatively low compared to last week’s price action with investors primarily focused on the drop in U.S. Treasury yields and the inversion of the 2-year/10-year Treasury yield curve, which some investors believe is predicting a future recession. The markets are also relatively calm ahead of the release of U.S. preliminary GDP data at 12:30 GMT.

At 06:54 GMT, Japan’s Nikkei 225 Index closed at 20460.93, down 18.49 or -0.09%. Hong Kong’s Hang Seng Index is trading 25517.79, down 97.69 or -0.38% and South Korea’s KOSPI finished at 1933.41, down 7.68 or -0.40%.

China’s Shanghai Index is trading 2889.96, down 3.79 or -0.13%. Australia’s S&P/ASX 200 settled at 6507.40, up 6.80 or +0.10%.

Investors Focused on U.S. Treasury Yields

Asian traders are taking their cues from the activity in the U.S. Treasury markets. Their primary focus is on the long-term 30-year Treasury bond yield and the inverted 2-year/10-year Treasury note spread.

The 30-year Treasury bond, which some consider the benchmark because of its ties to the mortgage market, dropped as low as 1.90% early Wednesday morning, breaking its prior all-time low of 1.916% hit earlier in August. This move also put the 30-year yield below yields of U.S. debt of far shorter duration such as 3-month and 1-month Treasury bills.

The yield on the 10-year Treasury note slipped further below that of the 2-year note at 1.469% and 1.504% respectively, after closing inverted for the second day in a row on Tuesday.

Stock and bond traders consider an inversion of the 2/10 note yield a notable recession signal although there are other events that have to happen before economists will declare a recession.

The inversion may not be signaling a recession at all, but may be reflecting huge demand from Japanese and German investors who are seeking any kind of return on their fixed income investments since their respective countries are offering negative interest rates.

Chinese Yuan Lower

The onshore Chinese yuan weakened past 7.17 against the U.S. Dollar for the first time in more that 11-and-a half years on Thursday, Reuters reported, before last trading at 7.1663.

The People’s Bank of China (PBOC) had set the official midpoint reference for the yuan at 7.0858 on Thursday morning. Meanwhile, offshore trading of the yuan was last at 7.1725 per dollar.

“While fears of China activity engaging in a currency war were abetted by the U.S. Treasury’s declaration of China as a ‘currency manipulator,’ the recent weakening of the yuan looks more like a controlled easing of China monetary policy to offset downward pressure on growth,” analysts at J.P. Morgan wrote in a note.

Aussie Shares Rise

Australia’s S&P/ASX 200 settled at 6507.40, up 6.80 or +0.10% on Thursday, led by strong gains in the gold, healthcare and utilities sectors. Rising stocks eked out a small gain against falling stocks, coming in at 586 to 567 respectively, with 376 ending unchanged.

Also in Australia, Private Capital Expenditures fell 0.5% for the quarter. Investors were looking for a 0.4% increase. However, the previous quarter was revised higher to -1.3%. In New Zealand, the ANZ Business Confidence Index fell to -52.3 from -44.3.

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