The surge in Treasury yields has pushed yield gaps with emerging Asia bonds toward record levels, raising the risk of capital outflows from the region, according to strategists.
A selloff in US government bonds deepened this week, with the 30-year yield surging to its highest level since 2004 on Thursday and the benchmark 10-year yield hitting its highest since 2007. This has pushed Malaysia’s 10-year yield discount to Treasuries to the widest since 2007, while yield gaps for Indonesia and Thailand are also nearing record levels.
“Longer-dated EM Asia bonds are particularly at risk from higher Treasury yields, especially low-yielders such as South Korea and Thailand,” said Stephen Chiu, chief emerging markets FX strategist at Bloomberg Intelligence. US yields’ rise could “either spur foreign outflows, or reduce net foreign inflows” into the region’s bonds.
For emerging Asia, the widening yield gap and potential capital outflows may result in a myriad of consequences, including putting downward pressure on local currencies. Regional central banks may then be driven to keep domestic interest rates elevated to defend currencies, which could boost borrowing costs and potentially weigh on economic growth.
By comparison, yield moves in emerging Asia have been more modest, rising by only as much as 7 basis points in Malaysia and Thailand on Thursday. The region has so far avoided the more severe selloff seen in US Treasuries, thanks to stable domestic inflation and resilient currencies.
This week, Malaysia’s 10-year discount relative to Treasuries widened to 125 basis points, the most since 2007, while a similar gap for Thai 10-year bonds reached 290 basis points, nearing a record low.
The China-US 10-year yield gap also widened to the most on record earlier this month, while Indonesia’s spread over Treasuries narrowed to 188 basis points, approaching an all-time low.
“The relentless uptrend in US yields does provide an uncomfortable backdrop for bond investors,” said Homin Lee, a senior macro strategist at Lombard Odier Singapore. “But it also revealed the resilience of USD and local debt markets in Asia, with the exception of more vulnerable Indonesia and Philippines.”
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