Asian Bonds Set to Rise Amid US Treasuries Rally on Cooling US Labor Market

Asian bonds are set to make gains following a rally in US Treasuries, driven by signs of a cooling US labor market. The labor market data shows job openings have dropped to a three-year low, which has spurred a rally in US Treasuries and led to a dovish shift in market sentiment.

The 10-year US Treasury yield has fallen by approximately 20 basis points to 4.3%, with market expectations for an interest rate cut in September rising to about 65%. This has led investors to increasingly bet on the Federal Reserve to slash interest rates sooner.

New Zealand bonds have already seen gains, with the yield on 10-year government bonds dropping by 7 basis points. Australian futures are also pointing to gains, with the yield on 10-year government bonds decreasing by 6 basis points.

In Japan, the 10-year bond yield edged down by 2 basis points, and Japanese Government Bond (JGB) futures climbed 21 ticks to 143.37, buoyed by robust demand at the latest 10-year debt auction.

Why this matters: The rally in US Treasuries and the dovish shift in market sentiment have significant implications for the global economy and financial markets. A potential rate cut by the Federal Reserve could lead to a shift in investor sentiment and impact bond yields and stock markets worldwide.

The US labor market data has reinforced speculation that the Federal Reserve will lower rates this year. Bill Adams at Comerica Bank noted that the risk of wage-price pressures fueling inflation is falling, allowing the Fed to 'breathe easier' than in previous years.

Markets are now focusing on a series of labor market readings this week, including Friday's US jobs report, for further clues on when the Fed might deploy rate cuts. Ronald Temple, chief market strategist at Lazard, believes the accumulating evidence suggests the Fed should begin easing.

In other market moves, the Nikkei 225 fell 1.3%, while Australia's S&P/ASX 200 rose 0.2%, and Hong Kong's Hang Seng rose 0.5%. The Bloomberg Dollar Spot Index was little changed, while the Japanese yen fell 0.2% to 155.25 per dollar.

Commodity markets saw Brent crude oil fall 1.5% to $77.18 a barrel, while gold was down 1.0% at $2,327.01. In the bond markets, the yield on Australian 2-Year government bonds was down at 4.04%, while the 10-Year yield was also down at 4.30%. US Treasury notes were down, with the 2-Year yield at 4.77% and the 10-Year yield at 4.33%.

Chinese stocks ended higher, supported by pharmaceutical and real estate stocks. The benchmark Shanghai Composite Index ended 0.4% higher at 3,091.20. Hong Kong's Hang Seng Index rose 0.1% to 18,422.20, erasing early losses. Japanese stocks ended lower, dragged by falls in financial and energy stocks. Indian shares fell, reversing the previous day's rally, as early results for the country's national elections indicated that the ruling coalition wouldn't win a decisive victory.

Fresh data showed that the number of job openings in the US sank in April to a more than three-year low of 8.1 million. The focus is now on the jobs report this Friday.

The global economy is recovering from pandemic aftershocks, including trade dislocations, outsize monetary and fiscal interventions, a prolonged inflation surge, and severe financial market volatility. Disinflation has occurred more rapidly than anticipated in most developed market economies, and macroeconomic and inflation risks look more balanced than they did a year ago.

Central banks are ready to shift toward rate cuts, likely on different schedules. The early 2020s inflation shock and steep policy rate hikes produced a generational reset higher in bond yields, which now embed significant inflation-adjusted cushion.

Starting yields are highly correlated with five-year forward returns, supporting an attractive long-term outlook for fixed-income returns as inflation recedes. Opportunities across global bond markets appear uncommonly attractive and diverse, with active country and security selection being key.

Asian bonds are set to benefit from the rally in US Treasuries and the dovish shift in market sentiment. With New Zealand bonds already up and Australian futures pointing to gains, the outlook for Asian bonds remains positive.

Key Takeaways

• Asian bonds to gain following US Treasury rally, driven by cooling US labor market.
• 10-year US Treasury yield falls 20 basis points to 4.3%, boosting rate cut expectations.
• New Zealand and Australian bonds see gains, with Japanese bonds edging down.
• Federal Reserve may cut rates sooner, impacting global economy and financial markets.
• Asian bonds to benefit from dovish market sentiment, with opportunities appearing attractive.