Rate outlook drags world stocks, yen slides

By Koh Gui Qing

NEW YORK (Reuters) -U.S. Treasury yields paused their ascent on Monday as oil prices fell on fears of weaker Chinese demand, while the yen at one point suffered its biggest daily fall since 2020 after Japan's central bank vowed to defend its low-rate policy.

But a break in a sell-off of Treasuries did not help U.S. stocks as investors stayed focus on how rising rates could hurt economic growth, a fear accentuated on Monday when the Treasury yield curve inverted for the first time since early 2006.

By mid-day, MSCI's gauge of stocks across the globe was down 0.21%, while the pan-European STOXX 600 index pared earlier gains to be up just 0.14%.

The Dow Jones Industrial Average lost 0.57%, the S&P 500 fell 0.22%, and the Nasdaq Composite was little changed.

A lockdown in China's financial hub of Shanghai to contain surging COVID-19 cases, meanwhile, weighed on Chinese shares. Oil prices also fell as investors anticipated weaker demand from the world's second biggest economy.

U.S. crude fell 6.41% to $106.60 per barrel and Brent lost 6.33% to $113.01.[O/R]

With some investors betting that U.S. rates could rise by 50 basis points in April, analysts warned that stocks could succumb to deeper losses in coming months.

"One of the more confounding developments during the past two weeks has been the strength of the rebound in the tech-heavy Nasdaq-100 Index at the same time interest rates soared to cycle highs," said Lisa Shalett, head of the global investment office at Morgan Stanley Wealth Management.

"As this and other yield curves head toward inversion, the nascent rebound in megacap tech stocks may stall."

Indeed, the U.S. Treasury yield curve, as measured by the gap between five and 30-year yields, inverted on Monday for the first time since early 2006, as a sell-off in the bond market resumed, with short-dated yields jumping to their highest since 2019.

Fixed-income analysts said the inverted yield curve indicated that some investors believe the Fed's policy tightening will put the brakes on economic growth. [US/]

The two-year Treasury yield climbed to 2.3277%, from 2.299%, while 10-year U.S. Treasury yields retreated to 2.459%, after initially pushing above the 2.5%-marker for the first time since 2019 [US/].

In Europe, however, the brutal sell-off in government debt continued, enabling Dutch and Belgian two-year bond yields to turn positive for the first time since 2014. [GVD/EUR]

The tide of rising global yields led Japan's central bank to declare a steadfast attempt to defend its 0.25% yield cap on Monday, when it vowed to buy an unlimited amount of government bonds for the first four days of the week. The announcement sent the yen reeling to a six-year low.

Unlike other major economies that are battling surging price pressures, inflation in Japan remains well below its 2% target.

The Japanese yen shed 1.01% versus the greenback to 123.47 per dollar, after skidding as much as 2.5% at one point to notch its biggest one-day drop since March 2020.

Japan should intervene in the currency market or raise rates to defend the yen if it weakens beyond 130 to the dollar, the country's former top currency diplomat, Eisuke Sakakibara, said.

Francois Savary, chief investment officer at Swiss wealth management firm Prime Partners, said portfolio rebalancing ahead of quarter-end helped explained strength in equities in the face of surging bond yields.

"A day of reckoning is coming because at the start of April you have earnings season and you will get a sense of the impact of rising energy prices and guidance for the future," he said

"I would not bet on the rally continuing in a straight line," Savary added.

Euro zone bonds continued their move into positive-yield territory, while money market pricing suggested investors were now anticipating 60 bps worth of rate hikes from the European Central Bank by year-end compared with 50 bps last week.

British 10-year bond yields hit their highest levels in six years, Swiss 10-year yields and Australian three-year bond yields rose to their highest levels since 2014.

In commodity markets, gold softened to $1,931 an ounce, down about 1.35%. [GOL/]

(Reporting by Dhara Ranasinghe Additional reporting by Sujata Rao in London and Wayne Cole in SyndeyEditing by Tomasz Janowski, Mark Potter and Cynthia Osterman)