Buckling bond market casts pall over stocks

Asian stocks slid on Friday to cap a torrid first week of the quarter for financial markets, with the dollar advancing and bonds crumbling as the resilience of U.S. jobs data has investors bracing for interest rates to head higher still.

MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) fell 0.8 per cent to a one-month low. Japan's Nikkei (.N225) fell 0.6 per cent.

Overnight, surprisingly strong partial figures on the U.S. labour market sent a selloff in bond markets into overdrive and pushed the S&P 500 stock index (.SPX) 0.8 per cent lower.

Two-year Treasury yields burst above 5 per cent and futures pricing started to admit the possibility that the Federal Reserve will raise rates twice before the year is out. Ten-year yields rose more than 17 basis points in two sessions to 4.05 per cent, and selling wrapped around the globe as investors who had positioned for a peak in interest rates bailed out.

Germany's two-year bond yield jumped to its highest in 15 years. In Britain, traders are now bracing both for recession and for interest rates heading towards 7 per cent, as selling across the curve drove 10-year gilt yields to post-2008 highs.

Three-year and ten-year Australian government bond yields each rose a dozen basis points on Thursday and a dozen more on Friday morning to hit decade highs.

"These were pretty savage moves," said Jack Chambers, senior rates strategist at ANZ in Sydney.

"It suggests some longs have maybe been squeezed out, and people caught," he said, with signs of strength in the U.S. economy starting to stoke nerves about how high rates could rise.

"Are we starting to price in the idea that there should be a higher term structure of rates? Maybe there has to be some reassessment given the resilience of a lot of economies to higher rates so far." Even well-anchored Japanese government bond yields rose on Friday.

Private U.S. payrolls jumped 497,000 last month, the ADP National Employment report showed on Thursday, against expectations for a 228,000 increase.

Broader non-farm payrolls data is due at 1230 GMT on Friday. S&P 500 futures were steady in the Asian morning.

The buckling bond market sent the U.S. dollar slightly higher, although not too far as yields had leapt globally and the fear of intervention has traders too nervous to short the yen.

The euro is down 0.2 per cent on the week at $1.0889. The yen actually rose overnight and is hovering at 144 to the dollar. The Australian dollar was last at $0.6629 and eying a small weekly loss, following the Reserve Bank of Australia's decision to pause rate hikes this week. The kiwi was at $0.6161 and eyeing a modest weekly rise.

Data on Friday showed Japanese wages rising at their fastest pace in 28 years in May, although it also showed hours worked rising even faster so hourly rates actually dropped.

Elsewhere in markets, Hong Kong banking stocks (.HSMBI) extended losses and are tracking towards their worst week in more than five years on worries about exposure to local government debt. Goldman Sachs has downgraded the sector.

The index fell 0.9 per cent on Friday and is down 10 per cent on the week. The Hang Seng (.HSI) fell 1 per cent and markets in South Korea (.KS11) and Australia (.AXJO) fell a little further.

In commodities, Brent crude futures were steady at $76.43 a barrel. Gold , which pays no income, was under pressure from higher yields while trading flat at $1,911 an ounce.