Stock markets get jitters as Greenspan predicts higher rates

Stock markets get jitters as Greenspan predicts higher rates

Yields of US 10-year govt bonds also hit highest in 5 years after his comments

ENJOY IT WHILE IT LASTS: Mr Greenspan expects borrowing costs to rise in the US and emerging economies, saying that the global liquidity boom would not go on forever. -- PHOTO: AP EXPECTATIONS of higher global interest rates pushed US government bonds to five-year lows yesterday, dragging Asian stocks down but lifting the US dollar to a 41/2-year high against the low-yielding yen. The yields of 10-year Treasury notes climbed to the highest in five years after former United States Federal Reserve chairman Alan Greenspan on Tuesday predicted an increase in benchmark yields and greater premiums on emerging-market debt. Bond prices move inversely to yields. 'The moment he made that comment, the market fell apart,' said Ms Irene Tse, co-head of US interest rate trading at Goldman, Sachs & Co in New York on Tuesday. The yield of the benchmark 10-year note climbed to 5.303 per cent in New York on Tuesday after Mr Greenspan's comments. With higher yields eroding the attraction of riskier assets such as equities, US stocks fell with the Dow Jones Industrial Average tumbling 129.95 points, or 1 per cent, to 13,295.01 on Tuesday. At 10.50am in London (5.50pm Singapore time) yesterday, the yield of the 10-year note was 5.316 per cent, according to bond broker Cantor Fitzgerald. US government debt has been under severe pressure over the past week, with yields rising sharply on anxiety over the likelihood that global credit conditions would tighten as the year progresses. Mr Greenspan reinforced that nervousness when he predicted that borrowing costs would rise in the US and emerging economies. He said that a global liquidity boom which he traced back to the end of the Cold War would not go on forever. 'Enjoy it while it lasts,' he told his audience at an event hosted by the Commercial Mortgage Securities Association in New York. Referring to historically low premiums on emerging-market debt, Mr Greenspan said 'it ain't going to continue that way'. 'And indeed, all the spreads you are looking at, including your spreads relative to the 10-year note, are going to start to open up and the 10-year note is going to be moving as well.' He added: 'So I'd suggest someone out there is not going to be as happy as we are today.' Treasuries had slumped earlier after reports in China and Japan showed rising consumer and producer prices, while the head of the British central bank signalled that borrowing costs may need to rise to keep inflation from accelerating. In the Greenspan fallout, interest rate-sensitive financial and property stocks were among the worst hit in Asia as traders worried about higher bond yields crimping margins. In Tokyo, the benchmark Nikkei 225 Stock Average dropped 0.16 per cent while Hong Kong's Hang Seng Index closed 0.28 per cent lower. Benchmark indexes in Singapore, Seoul and other Asian countries also declined. Chinese share prices, however, defied the regional trend, closing 2.56 per cent higher and extending sharp gains as investors discounted the chances of the government raising interest rates again in the short term. Mr Greenspan did play down the prospect of a wholesale pullout by China from US government bonds, forcing a sharp spike in US interest rates. Still, he said the reason such a withdrawal was unlikely was that China would not have anyone to sell the securities to, hardly the sort of comfort that jittery bond investors were seeking. Higher US bond yields also boosted the US dollar by 0.5 per cent to 122.3 yen, a level not seen since late 2002. The yen has been a favoured currency for funding the carry trade, with investors borrowing the low-yielding Japanese and Swiss units and picking up easy returns by investing in high-yielding currencies including the New Zealand and Australian dollars. BLOOMBERG NEWS, REUTERS