By Xie Yu

International stocks dropped Friday, tracking declines in U.S. indexes, as a selloff in bonds helped dent investor appetite for richly valued shares.

However, U.S. Treasury notes rose in price, regaining some of the previous session's losses, and futures suggested stocks in New York could stabilize or gain slightly in Friday trading.

Investors said the market had been reassessing prospects for interest-rate increases by the U.S. Federal Reserve, despite assurances from Chairman Jerome Powell that the central bank won't raise rates anytime soon.

"What has happened in recent weeks is the markets have had to reprice expectations of the Federal Reserve's rate hikes," said Dwyfor Evans, head of macro strategy for the Asia-Pacific region at State Street Global Markets in Hong Kong.

He said the pickup in bond yields would have knock-on effects on areas such as corporate lending and mortgage rates. "That's why equities will come under pressure here, because rising yields will have some impact on the real [economy] and earnings might have to slow," Mr. Evans said.

By late morning Friday in Hong Kong, major benchmarks in Japan, South Korea and Hong Kong had all fallen more than 2%. In China, the CSI 300 Index of large stocks listed in either Shanghai or Shenzhen lost 1.8%.

"Given the market has already rallied over the past 10 months, you are seeing quite a bit of profit-taking," said Ken Wong, a portfolio manager at Eastspring Investments. Mr. Wong said rising borrowing costs were already causing some market participants to unwind positions bought using leverage, while expensive valuations were also fueling caution.

As of Thursday, the MSCI AC World index traded at a price of 20 times expected earnings, according to Refinitiv data, a 37% premium to the average of the last 10 years.

On Thursday, the S&P 500 retreated 2.4% and the Nasdaq dropped 3.5%, as the yield on the 10-year Treasury note rose to a one-year high above 1.5%. Bond yields move inversely to prices.

But futures suggested the stocks selloff might not extend much further in U.S. markets Friday, with those on the S&P 500 adding 0.1% and Nasdaq-100 futures down 0.3%.

In Asian trading, the yield on the 10-year Treasury declined 0.055 percentage point to 1.460%, according to Tradeweb.

Write to Xie Yu at Yu.Xie@wsj.com

(END) Dow Jones Newswires

February 25, 2021 23:57 ET (04:57 GMT)

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