A sell-off in global sovereign bonds pushed Asian stocks to two-week lows on Wednesday as investors worried it might trigger profit-taking in other asset classes, while the US dollar stayed on the backfoot dogged by deficit concerns.

Bonds have been among the best performing asset classes in recent years thanks to the unconventional policy easing steps taken by global central banks, but signs are emerging that investors are tired of chasing ever-shrinking yields.

As bond yields rose sharply from Germany to Australia in recent days, stock markets began to flounder.

Asia-Pacific shares

An index of Asian shares have fallen 3 per cent after hitting a more than seven-year high on April 29. On Wednesday, MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.3 per cent, while Australian stocks fell 1.5 per cent.

Market participants struggled to make sense of the simultaneous selloff in euro zone and US debt markets and global equities, alongside the rise in commodities.

German bund yields

The churn appeared to have been sparked by the persistent rise in German bund yields, driven by worries over a Greece debt default and excessively long positions in European debt.

“The current selloff in bonds appears to have been led by developments in the eurozone markets,’’ Ashish Agrawal, an emerging markets strategist at Credit Suisse in Singapore, said.

But he also went on to note that monetary policies have generally become more supportive of growth, which could help other asset classes escape the bearish influence of bonds.

“If growth prospects stay intact, it will be too early to conclude that this weakness in bonds will have an impact on other asset classes such as equities,’’ Agrawal said.

For now, a two-week sell-off in German Bunds, alongside Treasuries and British Gilts, has led to worries about eurozone monetary conditions and an unwind of both short positions in the euro and investments in eurozone equities.

In just four sessions yields on 10-year German paper had tripled to 0.517 per cent and erased all the gains made this year. On Tuesday alone, Italian, Spanish and Portuguese yields all rose between 27 and 30 basis points.

The US 10-year Treasury yield touched a two-month top at 2.2 per cent having climbed from 1.92 per cent in little more than a week.

And the front end of the Australian bond curve has surged higher with three-year bond yields up by more nearly half a per cent in the last three weeks.

Mixed bag

With bond yields surging higher, profit-taking on equities emerged with some market darlings such as Indian shares having fallen nearly 9 per cent since early March.

In China, however, stock markets recovered after posting their biggest loss in nearly four months on Tuesday as investors, encouraged by a positive survey of the services sector, hunted bargains.

The CSI300 index was up 1.8 per cent while the Shanghai Composite Index was up more than 1 per cent in early trades after suffering steep losses on Tuesday.

The Dow had ended on Tuesday down 0.79 per cent, while the S&P 500 lost 1.18 per cent, and the Nasdaq 1.55 per cent. The pan-European FTSEurofirst 300 equity index shed 1.6 per cent.

A broad bounce in commodities saw oil and copper prices rise to their highest levels so far this year.

Brent crude has climbed almost 50 per cent from its January trough to reach $67.66 a barrel, with US crude not far behind at $60.71.

In currencies, the US dollar was less lucky as an unexpectedly sharp widening in the US trade deficit suggested the economy may have shrunk in the first quarter.

The dollar index fell as far as 94.877, retreating from a one-week high of 95.946. It last stood at 94.95.

Against the yen, the greenback eased to 119.94 from a 3-1/2 week high of 120.51. The euro rebounded to $1.1214, from Tuesday’s low of $1.1066.

Later in the day, Federal Reserve Chair Janet Yellen is scheduled to speak and markets will be super sensitive to any guidance on the outlook for the first hike in interest rates.

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