Asian shares drop, 30-year treasuries hold losses

Asian markets

Asian shares fell and Treasuries held Wednesday’s declines as concerns grow over a proposed tax bill that would enlarge the US deficit.

A regional stock gauge dropped for the first time in three days on weaker openings in Australia, Japan and South Korea. A gauge of the dollar edged down for a fourth consecutive session. US equity-index futures drifted higher after the S&P 500 index closed down 1.6% on Wednesday, its sharpest slide in a month. Yield on the 30-year US sovereign bond stayed above the crucial 5% mark.

Opposition to President Donald Trump’s tax-cut plan and the ballooning deficit is showing up in the bond market with Treasuries falling across the curve Wednesday. Tepid demand for a $16 billion sale of 20-year bonds rekindled fears over US government borrowing. That sapped sentiment after a sharp rebound in risk assets over the past month and revealed structural concerns in the debt market.

Long-term yields “are probably biased to the upside in the very near term, given concerns over the upcoming tax bill bill, in terms of adding to the deficit,” Audrey Goh, a head of asset allocation at Standard Chartered Wealth Management Group, said in a Bloomberg TV interview. There’s also some uncertainty on “how much demand will be out there for long-term Treasury bills.”

The concern in the bond market is that the tax bill would add trillions of dollars in coming years to already bulging budget deficits at a time when investor appetite is waning for US assets across the globe.

Traders have been piling into bets that long-term bond yields would surge on concerns over the US’s swelling debt and deficits, with Moody’s Ratings on Friday lowering the nation’s credit score below the top triple-A level. For many, the message was: Unless America gets its finances in order, the perceived risks of lending to the government will rise.

In Japan as well, the sovereign debt market is flashing a warning to the central bank that dialing back its bond purchases needs to be done with great care. The issue was in sharp relief this week, with investors shunning an auction of government debt and yields soaring.

“It’s a global issue as investors struggle with a new playing field,” said Nick Twidale, chief analyst at AT Global Markets Australia. With the spike in Japanese government bond yields, Japan’s fiscal health could become “a concern” for global investors, he said.

In Asia, investors will be monitoring the Korean won after the currency jumped to a six-month high. Local media had reported that the US believes a relatively weak won is a fundamental cause of South Korea’s trade surplus. The currency weakened 0.4% in early Asian trade.

Markets Live Strategist Mary Nicola says:

“Asia’s currencies are poised to rise given valuations and the Trump administration’s commitment to mending glaring imbalances. The pace and scale of those gains will depend less on fundamentals and more on a delicate balance of geopolitics, policy signaling, and the trade-offs between growth and global diplomacy.”

Meanwhile, former Treasury Secretary Steven Mnuchin said he’s more alarmed by the US’s growing budget deficit than its trade imbalances, and urged Washington to prioritize fiscal repair.

The murky economic outlook fueled hedging activity in Treasury options, with investors targeting higher rates on longer-dated bonds by the end of the year. Those wagers echo sentiment on Wall Street, where strategists from Goldman Sachs Group Inc. to JPMorgan Chase & Co. are lifting their forecasts for yields.

“These higher yields make it much tougher to justify today’s very high valuation levels,” said Matt Maley at Miller Tabak. “So, it’s something that will likely create some renewed headwinds for stocks.”

In commodities, gold rose for a fourth session Thursday. Oil extended its drop as higher US crude stockpiles reinforced worries about an oversupplied market, with geopolitical concerns also in focus. Bitcoin hit an all-