Funds quit Asian stocks for US bonds

PUBLISHED : Wednesday, 08 March, 2006, 12:00am
UPDATED : Wednesday, 08 March, 2006, 12:00am


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Regional markets drop as rising yields lure investors away

Asian share markets fell yesterday as rising United States bond yields drew money away from equities and heightened worries that interest rates could remain in their tightening cycle for longer than was earlier expected.

Key indices across the region ended the day deep in the red. The Hang Seng Index fell 1.32 per cent, its biggest drop in a month, while Japan's Nikkei-225 Index declined 1.1 per cent, the Korea Composite Index lost 2.08 per cent and the Shanghai Composite Index tumbled 2.25 per cent.

'Over the past two years we have seen at least three substantial corrections, this may be another one of them,' said Eddie Wong, the chief Asian strategist at ABN Amro. 'In the short term ... the interest rate worry may encourage quite substantial profit taking.'

Traders put much of the blame on rising US bond yields, which indicate the market expects the US Federal Reserve to further raise borrowing rates. Higher yields on bonds, which are seen as lower risk than equities, also attract money away from Asian stock markets.

'If you can get a 4.75 per cent yield in a US dollar bond, why would you bother holding any Japanese stocks for yield?' said SG Securities sales trader Andrew Clarke.

Higher interest rates are bad for property sector growth, which has been a key driving force in many Asian economies, particularly in Hong Kong.

Investors are also worried that Japanese central bankers could decide to reduce the amount of liquidity they inject into the market when they meet later this week.

US bond rates have been at below average levels in recent years, prompting many investors to move money elsewhere, such as Asian equities. Rising interest rates make US bonds more attractive again.

'Investors could move their bond portfolios back to neutral, and that means that money would go back to the US bond market,' Mr Wong said.

Stock prices were also knocked lower by disappointment over the first-quarter corporate earnings data released so far, and concern that those reports yet to come may be below expectations. While some results, such as HSBC Holdings, showed solid business growth, they were already largely accounted for in share prices, traders said.

'The results so far have not been bad, but they haven't been fantastic,' Mr Clarke said.