A sharp 7.3 decline in Japan’s stock market, its worst sell-off since the March 2011 earthquake and tsunami, spread around the world Thursday, as ETF investors took measure of various cross currents—including signs of slowing growth in China and hints from the Federal Reserve that it could curtail monetary stimulus sooner than many were expecting.
But perhaps most noteworthy in the plethora of rapidly shifting asset prices has been the rapid rise in yields on benchmark Japanese government bonds (JGBs) in the past month and past few days. It’s a turn of events that suggests some investors may view JGBs as something of a risk asset—an unsettling prospect considering the Bank of Japan has committed to buying 70 percent of new debt to help keep bonds yields low.
“Clearly the rise in bond yields occurred faster than expected, and the market was right to be concerned,” Sumit Roy, an analyst with Hard Assets Investor said, noting yields on benchmark JGBs have more than doubled in the past month to 0.99 from 0.44 percent. Roy noted that the yield-related rumblings might well be the biggest driver of investor fears now coursing through financial markets.
In any case, in the world of stocks, the two biggest ETFs targeting Japanese equities, the $12.64 billion iShares MSCI Japan Index Fund (EWJ) and the $10.78 billion WisdomTree Japan Hedged Equity Fund (DXJ) were down 5.4 percent and 5.6 percent, respectively, in trade early on Thursday afternoon.
Japanese markets were hit the hardest, as other equities markets around the world—as measured by the SPDR S'P 500 ETF (SPY) and the Vanguard MSCI EAFE ETF (VEA)—didn’t fall nearly as much as the Nikkei. VEA was in the red to the tune of 1.75 percent, while SPY fell 0.33 percent in afternoon trade in the United States, with both funds off earlier lows
Comments from Fed Chairman Ben Bernanke yesterday on Capitol Hill left investors with a sense that the Fed sometimes this year could begin to slow its bond purchases aimed at keeping borrowing rates low sometime this year. Bernanke has previously said stimulus would remain in place until the U.S. jobless rate, now at 7.5 percent, falls to 6.5 percent.
Bernanke ’ s comments coincided with news from China that growth of its factory sector actually turned negative in May in the latest survey. Together, the two events spurred fears global growth might falter in the coming months.
The S'P 500 Index, which was at 1647.82 in afternoon trade, has technical support at 1637 and resistance at 1650, according to Paul Weisbruch, an ETF trader at King of Prussia, Pa.-based Street One Financial.
A 1.00 Percent JGB Yield Threshold
The 1.00 percent yield threshold looms large in markets, as many see that as a level that might begin to pose a threat to Japan funding its budgetary deficit in an orderly manner.
A rise in JGB yields would also mean Japanese companies would also be facing higher funding costs, and at precisely the time when the Bank of Japan is trying to stimulate growth and international exports by keeping borrowing rates under control.
The bottom line is that if speculators are indeed lining up to take on the BOJ and aim to sell more bonds than the Japanese Central Bank can purchase, then global financial markets are in for a rough ride.
On the other hand, the pullback in global markets may not be anything to be alarmed about, as stocks have been on a multimonth rise, lifting major benchmarks like the S'P 500 to record levels and leading some to worry that a one-way rise wasn’t a good way for a true bull market to manifest.
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