The recent rally in emerging-market assets, which had seen a four-day winning streak in stocks, stalled due to a significant surge in long-term US Treasury yields. This increase in borrowing costs, coupled with renewed geopolitical tensions in the Middle East, drained demand for riskier assets and negatively impacted emerging markets.
This bond sell-off is largely attributed to a reassessment of Federal Reserve policy. Traders are now pricing in a 65% chance of a Fed rate hike in September, up from 40% just a week prior, with some analysts anticipating at least a three-rate hike cycle. This hawkish shift by the Fed, influenced by rising energy prices stoking inflation fears and Federal Reserve Chair Kevin Warsh's recent speech, is a key driver of the global bond yield surge.
The impact is global, with Japan's 10-year benchmark yield hitting 3% for the first time since 1996, Britain's 10-year yield reaching its highest since 2008 above 5.25%, and the German equivalent rising to a 15-year high of 3.36%. The 10-year U.S. Treasury yield, a benchmark for asset prices, climbed to 4.8%, its highest since early 2025. These higher yields are also putting pressure on tech companies that rely on bond markets for AI investment funding, potentially spilling over into equity markets. Despite this, some emerging markets, particularly Brazil, Turkey, and Colombia, are still favored for carry trades due to high nominal and inflation-adjusted yields, especially after the U.S. Treasury's bond buyback plans weakened the dollar, although this "wall of money" for emerging markets has been temporarily disrupted by the Iran war.
