Asian shares extend losses after China HSBC flash PMI

SINGAPORE (Reuters): Japanese Government bonds plunged on Thursday, taking yields to their highest in a year and leading a sell-off in bonds globally after Federal Reserve Chairman Ben Bernanke’s remarks sparked worries of a reduction in US monetary stimulus.

Bernanke’s comments, suggesting the Fed’s massive bond purchases could be scaled back in the next few policy meetings if the economy improves further, triggered a reaction across a swathe of markets, lifting the Dollar to a three-year high versus a basket of currencies and the US 10-year Treasury yield to the highest in two months.

Asian shares fell and extended their losses after a survey showed that China’s factory activity shrank for the first time in seven months in May, adding to concerns that a recovery in the world’s second-largest economy is sputtering. JGB prices dived as a surge in US Treasury yields added to the woes of Japan’s bond market, which has suffered a steep sell-off after the BOJ unleashed massive monetary stimulus last month to boost inflation.

“Bernanke seems to be leaning towards reducing bond purchases, which was a bit of surprise. In addition, the Bank of Japan didn’t offer any concrete steps to calm the JGBs,” Pinebridge Investments in Tokyo fixed-income head Tadashi Matsukawa said. In testimony to Congress on Wednesday, Bernanke said a decision to scale back the US$ 85 billion in bonds the Fed buys each month could be taken at one of the central bank’s ‘next few meetings’ if the economy looked set to maintain momentum.

Bernanke’s comments came just after BOJ Chief Haruhiko Kuroda disappointed JGB players by offering only lip service to the recent rises in JGB yields and reiterated they could naturally rise when the economy improves. The 10-year JGB yield rose to 1.000%, its highest level since early April last year, and last stood at 0.955% up seven basis points on the day.

The 10-year JGB yield has more than tripled from a record low of 0.315% hit on 5 April, the day after the BOJ unveiled its unprecedented monetary expansion. To appease nervous investors, the BOJ offered 2.0 trillion Yen cash in one-year contract, a type of market operation the BOJ has used a few times in recent weeks when it wanted to reduce volatility in JGBs market though with limited success.

The US 10-year Treasury yield hit a two-month high of 2.069% earlier on Thursday and last stood at 2.044%. In the stock market, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.5%. MSCI’s index extended its losses after the flash HSBC Purchasing Managers’ Index (PMI) for May fell to 49.6, slipping under the 50-point level demarcating expansion from contraction for the first since October.

Japan’s benchmark Nikkei share average showed some very choppy moves. The Nikkei was last up 0.2% on the day after rising 2% earlier and hitting a 5-1/2 year high. In commodities markets, Brent crude slid 0.6% to US$ 102.02 a barrel, while gold eased 0.1% to US$ 1,367.81 an ounce.