Asian stock markets experienced a significant decline on Wednesday as a sharp increase in U.S. bond yields unsettled investors ahead of crucial inflation data that could influence the Federal Reserve’s monetary policy. Following the reopening of markets after the Veterans Day holiday, short-term Treasury yields surged to their highest levels since late July, propelling the U.S. dollar to a peak not seen in over three months against the yen.
The surge in bond yields has been largely attributed to expectations surrounding Donald Trump’s return to the presidency, which many analysts believe will lead to increased government borrowing due to proposed tax cuts and higher tariffs. These anticipated policies are expected to widen the fiscal deficit and may also contribute to inflationary pressures, complicating the Fed’s path toward potential interest rate cuts.
Kyle Rodda, a senior financial markets analyst at Capital.com, noted that this situation is part of what he terms the “Trump trade,” which fundamentally revolves around deeper deficit spending. He cautioned that as seen in past market surges, a conflict often arises between equities and bonds; higher risk-free rates can ultimately suppress stock valuations.
The immediate reaction from U.S. equity markets was notable, with stocks reaching record highs in anticipation of Trump’s policies. However, this rally came to a halt as bond yields continued to climb. The two-year Treasury yield reached 4.351%, having spiked to 4.367% on Tuesday—the highest level since July 31. Meanwhile, the 10-year yield hovered around 4.43%, close to its four-month peak of 4.479% observed shortly after Trump’s decisive victory.
In Asia, the Hang Seng Index in Hong Kong fell by more than 1%, while a subindex tracking mainland Chinese property stocks dropped by 2.5%. Japan’s Nikkei index and South Korea’s Kospi both declined by approximately 1.8% and 2.2%, respectively. Australia’s stock benchmark also faced pressure, falling by 1% as commodity shares weighed heavily on market sentiment.
Commodities were broadly weaker amid growing concerns about China’s economic outlook, particularly in light of Trump’s threatened trade tariffs. Despite stimulus measures announced by Beijing, investor optimism regarding an economic revival has remained muted.
The U.S. dollar strengthened significantly during this period, climbing as high as 154.94 yen for the first time since July 30 before settling around 154.88 yen. This movement places the dollar-yen pair near the crucial threshold of 155 yen per dollar—a level that many market participants view as a potential trigger for intervention by Japanese authorities.
Atsushi Mimura, Japan’s finance ministry currency czar, indicated last week that officials are prepared to take necessary actions if excessive currency movements occur. Analysts suggest that if the dollar breaches the 155 yen mark, it could quickly rise towards levels last seen in May.
The U.S. dollar index, which measures the strength of the dollar against a basket of currencies including the euro and yen, stood at 106.03—close to its recent high of 106.17, marking its strongest position since May 1.
As investors brace for upcoming inflation data, expectations are building around how these figures will impact Federal Reserve policy decisions. Currently, traders are pricing in a roughly 62% chance that the Fed will implement a quarter-point rate cut during its next meeting on December 18, according to CME Group’s FedWatch Tool.
Economists anticipate that today’s consumer price index (CPI) report could reveal a monthly increase of approximately 0.3% in core inflation—a figure that could further influence market sentiment regarding future Fed actions.
The recent spike in U.S. bond yields has created unease among investors across global markets as they await critical inflation data that may dictate future Federal Reserve policy adjustments. With rising yields impacting stock valuations and strengthening the dollar, market participants are closely monitoring developments that could signal shifts in monetary policy and economic conditions moving forward.
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