By Danilo Masoni and Rae Wee
MILAN/SINGAPORE, Sept 30 (Reuters) - Global bonds inched up 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 were broadly unchanged in Europe, while US futures pointed to a slightly lower 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 5.2363% in the European hours, down 1.9 basis points (bps). They were set for a rise of more than 47 bps this month, the largest move in about two years. Bond yields move inversely to prices.
The 2-year Treasury yield dipped 1.0 bps to 4.8787% 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.
With bond markets searching for fresh direction, investors were awaiting the Fed's preferred inflation measure, the PCE index, for August later in the day. Economists polled by Reuters expect annual inflation of 3.7%, while money markets now see roughly even odds of an October rate hike by the Fed, down sharply from more than 70% on Tuesday.
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 26 bps and 63 bps, respectively, for the month. [GVD/EUR]
German inflation figures for September were also due, while data in Europe showed French consumer prices rising more than expected in September and Italy's annual EU-harmonised inflation rate accelerating to 4.1% amid soaring energy costs. .
In Japan, the 10-year government bond yield hovered near multi-decade highs, up 11 bps this month. [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 down 0.07% at 1111 GMT, coming off opening highs and setting the index for a monthly loss of around 2%. It is down 0.6% for the quarter.
MSCI's broadest index of Asia-Pacific shares excluding Japan rose 0.16% and was down 1.3% this month. Japan's Nikkei jumped 1.9%, ending the month up 0.7%, while South Korea's Kospi scored a monthly gain of 0.3%.
Nasdaq futures edged 0.14% lower and S&P 500 futures were down 0.04%. The S&P 500 was broadly unchanged this month, and up 2.3% so far in the quarter.
"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 rose 0.3%, struggling to lift off a one-year low made earlier in the week. The gauge is down 12.5% 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 almost 2% against a basket of currencies, helped by the rise in yields, though it fell 0.19% on the day.
That left the euro trading just above a 16-month low at $1.1357, up 0.15% on the day. It was headed for a monthly loss of 2.2% as the currency struggled in the face of a global energy shock and growing political risk in Europe.
Sterling was up 0.44% to $1.3288 after data showed the British economy grew faster than previously estimated in the second quarter, bolstering expectations of a Bank of England rate hike by year-end. It remained down 1.9% for the month.
The yen added 0.14% to 157.05 per dollar and was eyeing a monthly gain of around 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 up 1.04% at $90.31 a barrel and Brent rose 0.85% to $103.47, both set for monthly gains on concerns about prolonged supply disruptions due to the ongoing Middle East war. [O/R]
Spot gold added 0.08% to $4,184.3 an ounce, down almost 6% this month. Bitcoin was up 0.4% at $83,915, set for an over 6% monthly gain. [GOL/]
(Reporting by Danilo Masoni, Rae Wee and Rocky Swift; Editing by Thomas Derpinghaus, Christian Schmollinger and Chizu Nomiyama )
