By Alun John

HONG KONG, (Reuters) – Asia shares rallied on Wednesday amid hopes for a negotiated settlement to the Ukraine conflict. Bond markets expressed concern that the U.S. might suffer from aggressive rate increases overnight after yields dropped below 2 year rates by 10 years.

MSCI’s Asia-Pacific share index, which is not based in Japan, rose 1% to its highest level since March 4th. Most Asian stock market markets were also positive.

The benchmark fell by 1% in the opposite direction of the general trend, as analysts pointed to profit-taking heading into the close of the fiscal year. On Tuesday, the benchmark closed at a high of two months.

On Tuesday, Ukraine proposed to adopt a neutral status as a sign that there was progress in face-to-face talks. However, the ground reports continue to report of attacks and Ukraine responded with doubt to Russia’s promises to reduce military operations in Kyiv.

However, this news enabled the to record their fourth consecutive session in gains overnight. This was after European shares rallied strongly.[.N] ()

The U.S. was not affected by Asia trade.

“On one hand, there have been positive developments regarding Ukraine and the market seems hopeful of a peaceful solution at some point. This is resulting in a little bit of a risk-on’ event with shares rising and yields trending higher,” stated Shane Oliver, chief economist at AMP Capital (OTC) Capital.

Then it is back to worry about inflation and bond yields. There’s also the debate over whether there will be a recession here in the U.S. due to the inversion in part of the U.S. yield-curve.

On Tuesday, the widely-reported U.S. Treasury yield curve of 2-year/10 year was briefly inverted. This occurred because bond investors believed that an aggressive Federal Reserve tightening could cause a decline in the U.S. economy’s long term health. [US/]

Falling yields for longer-dated bonds below those of shorter dates indicates a loss of faith in future growth. 10-year yields that fall below 2-year rates are widely considered a sign of recession.

However, this month’s spread between 10-year notes and Treasury bills 3-months apart was still steeper.

Oliver said that “the messages from the yield curve can be very confusing.”

Last Monday’s benchmark U.S. 10-year yield reached 2.3815, slightly lower than its April 2019 peak of 2.557%. This was as traders prepare for rapid rate increases by the U.S. Federal Reserve.

Last year, the spread between yields of U.S. 10-years and 2-years was at 2.7 basis point.

JAPAN IN FOCUS

Rising yields from the U.S. are also making it difficult for Japanese bond yields to keep up with inflation, an issue that could threaten Japan’s wildly loose monetary policy.

On Wednesday, the Bank of Japan offered to increase its buying of government bonds throughout the curve through emergency markets operations and unscheduled purchases to protect its yield cap.

This seemed to be a sign of its determination to stick to the policy. However, analysts have questioned the sustainability of the strategy.

“I wouldn’t be surprised if the Bank of Japan sets a higher limit for 10 year JBG yields – currently at 0.25%. They can’t afford to be too far behind the curve, because if the yen were to weaken further beyond certain levels it could raise market fears,” said Joël Le Saux fund manager of Eurizon Fund’s Sustainable Japan Equity sub fund.

Due to the widening gap between U.S. yields and Japanese yields, the yen has been steadily falling. It was trading at 122.36 dollars on Wednesday morning, a slight recovery from Monday’s low point of 124.3. However, the dollar was up 6.9% against the yen for this month.

The euro was also at $1.1104, supported by prospects for peace in Ukraine. It had jumped almost 1% overnight. [FRX/]

Analysts say that despite hopes for Russia-Ukraine negotiations, oil prices remained firm due to tight supply.

The price of a barrel rose 1 percent to $111.36 Increased 0.83% to $105.12. [O/R]

The price of an ounce rose 0.1%, to $1920.6 [GOL/]