Bonds set for bruising September, but stocks remain resilient

By Danilo Masoni and Rae Wee

MILAN/SINGAPORE, Sept 30 (Reuters) - Global bonds ‌inched higher on Wednesday but ​were set for their ​worst month in years, hit by a mix of deteriorating government finances, a glut of debt issuance and rising inflation as the seven-month-old US-Israeli war on Iran keeps energy costs elevated.

Stocks fared better, however, largely unfazed by the recent surge in bond yields, supported by robust earnings growth, strength in the ‌global economy and continued enthusiasm for artificial intelligence. Equity indexes rose across Asia overnight and in Europe, while US futures pointed to a ⁠slightly firmer open on Wall Street.

The rise in borrowing costs has been front-and-centre for investors, given that sovereign yields are an anchor for global markets, a reference price for investing in riskier stocks and a benchmark for mortgages ‌and corporate borrowing.

Benchmark 10-year US Treasury yields held just ‌below their highest level since June 2007 at 5.209% in the early European morning, down 4.6 basis points (bps). They were set for a rise of more than 45 basis points this month, the largest move in about two years. Bond yields move inversely to prices.

The 2-year Treasury yield dipped 1.9 bps to 4.870% after New York Federal ​Reserve President John Williams pushed back against expectations for earlier policy tightening, though it remained more than 50 bps higher for the month.

"We have reached yield levels that are becoming genuinely significant," said Carlo Franchini, head of institutional clients at Milan-based Banca Ifigest. "The temptation to move out of equities could become an issue."

However, Franchini said he was not yet ⁠taking profits on stocks, betting that equities could remain supported through October if easing tensions around the Strait of Hormuz helped bring down oil prices and relieve some of the pressure on bond yields. "In my view it is better to ​stay long," he said.

Yields on 10-year German and French government bonds hit 17-year and 18-year highs this week and were set for rises of about 70 basis points and 120 basis points, respectively, for the quarter. [GVD/EUR]

In Japan, the 10-year government bond yield hovered near multi-decade highs ​and was poised for a 38-basis-point jump this quarter. [JP/]

STOCKS DEFY THE YIELD SURGE

Despite the sharp rise in ‌sovereign borrowing costs this quarter, stock markets have remained broadly resilient.

Europe's pan-regional STOXX 600 was up 0.6% at 0812 GMT, and even though the index is on track for a monthly loss of 1.4%, it is broadly unchanged for the quarter.

MSCI's broadest index of Asia-Pacific shares excluding ⁠Japan rose 0.3% and was on track for a monthly fall of 1.1%. Japan's Nikkei < .N225> jumped 1.9% and was set to end the month up 0.6% and the quarter down 4.7%, while South Korea's Kospi was headed for a monthly gain of 0.3% and a quarterly plunge of 19%.

Nasdaq futures edged 0.2% higher and S&P 500 futures added nearly 0.3%.

"What was surprising to us was the sanguine reaction of the equity ⁠market where the growth in nominal GDP was driving earnings optimism," said Mohammed Apabhai, Citi's head of Asia-Pacific trading strategy, in a note, referring to the recent rise in bond yields.

"US equity markets are ​reacting to the rise in bond yields but only outside of the tech space."

In Chinese shares, the blue-chip CSI 300 index < .CSI300> was up 0.3% and was struggling to lift off a one-year low made earlier in the week. The gauge is on course for a 12% slump this quarter, the largest since the height of COVID-19 lockdowns.

DOLLAR GETS A LIFT

In currency markets, the dollar was on track for a monthly ‌gain of roughly 2%, aided by the rise in US yields, though it inched 0.1% lower on the day.

That left the euro trading just above a 16-month low at $1.1346. It was headed for a monthly loss of 2.3% as the currency struggled in the face of ‌a global energy shock and growing political risk in Europe.

Sterling was up 0.2% to $1.326, and was set to lose 2.1% for the month.

The yen, however, added 0.2% to 156.95 per dollar and was eyeing ⁠a monthly gain of 1.7%, with investors wary of pushing the currency lower ‌due to the threat of a joint intervention by ​Tokyo and Washington.

In commodities, US crude was unchanged at $89.41 a barrel and Brent eased 0.1% to $102.47, both set for monthly gains on concerns about prolonged supply disruptions due to the ongoing Middle East war. [O/R]

Spot gold added 0.44% to $4,199.28 an ounce. [GOL/]

(Reporting by Danilo Masoni, Rae Wee and Rocky Swift; Editing by Thomas ‌Derpinghaus and Christian Schmollinger)

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