Sharemarkets across Australasia have sold off heavily following a 2.1 per cent slump on Wall Street on Friday, prompting fears that a major ‘bubble’ deflation has begun.
At 3.30pm AEST on Monday, Australia’s ASX200 index was down 1.55 per cent; New Zealand’s index of top 50 companies was down 2.06 per cent; Japan’s Nikkei index was down 2.4 per cent; and Hong Kong’s Hang Seng was down 1.79 per cent.
Fears of a major correction were stoked last week when former US Federal Reserve chairman Alan Greenspan told Bloomberg TV that “we have a stock market bubble and we have a bond market bubble … At the end of the day, the bond market bubble will eventually be the critical issue.”
Economists expect falling demand for bonds to push up the cost of borrowing, putting pressure on company profits by increasing their financing costs.
That would lead to both bond and share prices falling a the same time.
Bonds continued to be sold off on Monday – as their price falls, the yield or effective interest rate paid by the bond’s issuer rises.
The yield on the US Treasury 10 year bond – the most influential bond in setting global borrowing rates – continued to rise on Monday, sitting at 2.87 per cent at 3.30pm AEST.
Economists expect a sharper sell-off in global share markets to occur if the yield on the 10 year Treasuries breaks through the critical 3 per cent boundary.