Japanese Shares Pull Asia Higher as Yields Rise

Japanese shares rose in Asia, as financial stocks gained from the prospect of higher lending rates, sending a Japan equity benchmark closer to a record high, Bloomberg reported.

Bank and insurance stocks in Japan were among the largest contributors to the Topix index’s gain, after domestic 10-year yields continued their rise above 1% on bets that the central bank will raise policy rates. The MSCI AC Asia Pacific Index hit its highest since late May amid a rally in Hong Kong-listed property and electric vehicle maker shares.

Most other regional benchmarks fluctuated in a narrow range as traders weighed the possibility of another Donald Trump presidency in the wake of his debate with Joe Biden last week. Equities in Australia and South Korea slipped. Contracts for US stocks fell during Asian hours, despite Wall Street edging higher Monday amid a rally in tech megacaps.

“Japan’s financials are strong with domestic 10-year yields approaching 1.1%,” said Sohei Takeuchi, a senior fund manager at Sumitomo Mitsui DS Asset Management Co. Japanese stocks may be seeing some global demand after generally lagging emerging and European markets, he said.

The 10-year Treasury yields pared some of the seven basis points gain on Monday, when the benchmark had approached 4.5% on speculation that a Trump presidency would lead to greater US fiscal deficits and higher inflation. The Bloomberg Dollar Spot Index climbed 0.1%, as the greenback strengthened against all of its Group-of-10 peers.

The prospect of a Bank of Japan interest rate hike coming later this month increased after an index showed confidence among the nation’s large manufacturers rose from three months earlier. Vanguard sees the yen at risk of falling toward 170 per dollar if potential BOJ policy changes this month fail to boost the country’s bond yields.

In China, pessimism about the domestic economy has sparked a surge in demand for government debt. The central bank said it will borrow government bonds from primary dealers, a sign it may be contemplating selling securities to cool down the rally.

The yield on China’s benchmark bonds fell to a record low on Monday as investors worry about the long-term economic growth.

In Europe, European Central Bank President Christine Lagarde signaled that there is not sufficient evidence that inflation threats have passed, feeding expectations that officials will take a break from cutting interest rates this month. The euro was little changed after French election results suggested there’s a smaller probability of extreme policies coming from the far-right.

After last week’s debate hurt Biden’s chances of winning reelection, Wall Street strategists — including the ones from Goldman Sachs Group Inc. to Morgan Stanley and Barclays Plc. — are taking a fresh look at how a Trump victory could play out in the bond market and are urging clients to position for sticky inflation and higher long-term yields.

Meanwhile, Biden called on voters to “render a judgment” on Trump, after a Supreme Court ruling paved the way for the presumptive Republican presidential nominee to potentially escape prosecution for his role in the Jan. 6 US Capitol riot.

The selloff in Treasuries “continued overnight as the rates market starts to price in a Trump election victory, which would likely see continued federal deficits and potentially higher inflation,” said Tony Sycamore, a market analyst at IG Australia. “Higher US Treasury yields will bring with it a stronger US dollar, both of which would be problematic for many Asian share markets.

In commodities, oil traded near a two-month high on escalating Middle East tensions and concerns over the Atlantic hurricane season as Beryl is named a category 5 hurricane. Elsewhere, gold was little changed.