The 10-year US Treasury yield surged by 16 basis points to 5.11% on Wednesday, reaching a level last seen in 2007. This increase, driven by robust US economic data and weak demand at Treasury auctions, is significantly stretching the yield gap with emerging Asian economies.
This widening gap is particularly affecting countries like Malaysia, whose 10-year discount to Treasuries expanded to 122 basis points, its deepest since 2007. While Thailand's 10-year spread tightened to 290 basis points and Indonesia's to 196 basis points, both are near record lows. Stephen Chiu, Bloomberg Intelligence's chief emerging markets FX strategist, warned that higher US yields put longer-dated EM Asia bonds, especially those with low yields like South Korea and Thailand, at risk of foreign outflows or reduced inflows.
The potential for money to exit EM Asia bonds or for inflows to slow could put pressure on local currencies. This might lead central banks in the region to maintain elevated policy rates to support exchange rates, which would in turn increase borrowing costs. Homin Lee of Lombard Odier Singapore noted the "uncomfortable backdrop for bond investors" but also highlighted the resilience of some Asian debt markets, with Indonesia and the Philippines being more vulnerable. The overall situation suggests a scenario where demand for certain EM Asia bonds could weaken, currencies could face pressure, and regional rates might stay higher for an extended period.
