HOW WILL HIGHER US YIELDS AFFECT ASIA?
Higher US yields typically exert upward pressure on Asian bond yields and borrowing costs, said Mr Chen Jiesheng, interest rate strategist at UOB.
This could translate into more expensive mortgages and other loans for households and businesses, while potentially dampening investment activity as financing costs rise, he added.
“Over in Asia, households are already facing challenges from higher import prices, particularly when higher yields are accompanied by a weaker currency,” said Ms Magdalene Teo, head of fixed income research for Asia at private bank Julius Baer.
Central banks will be closely watching the rise in yields, particularly if inflation persists and leads to second-order effects, which could then prompt them to respond with rate hikes, she added.
Such higher base rates would in turn push up mortgage rates, she pointed out. For investors, elevated interest rates could weigh on rate-sensitive income assets such as real estate investment trusts (REITs) and bonds.
The situation becomes more difficult for central banks when higher yields are driven by elevated oil prices and inflation concerns, especially if economic growth is slowing, said Ms Teo.
Globally, bond markets are likely to have higher yields for an extended time period amid sizable fiscal deficits in many large economies and an AI-related investment boom, said DBS’ Mr Leow.
If yields stay higher for longer, Asia could face tighter financial conditions and higher borrowing costs, said UOB’s Mr Chen.
However, he added, the region is relatively well placed to withstand such pressures.
“Asia as a whole has strong savings rates, and most economies have adequate and robust foreign exchange reserves, so our region is able to better withstand disruption from higher yields.”
HOW DIFFERENT ASIAN COUNTRIES WILL BE AFFECTED
Mr Leow said that higher yields in developed markets such as the US mean Asian assets will face more competition for investor capital.
“The differentiation will depend on what each economy offers. These could include things like political stability, exposure to AI, commodities, fiscal prudence. In that regard, Asia is quite diversified,” he said.
Structural forces like large fiscal deficits will not be easy to reverse, meaning yields are likely to stay elevated for some time, he added.
This will intensify competition for capital, and Asian economies will have to find ways to maintain their attractiveness to investors, he said.
The impact of higher oil prices will also vary across the region. Previously, net energy importers suffered while net energy exporters benefited from higher oil prices, said Julius Baer’s Ms Teo. This time around, however, strong AI-related exports from countries like China, Japan and Korea are providing some cushion to growth, while China’s greater energy independence could help insulate it from elevated oil prices, she added.
In Indonesia, government bonds have continued to attract foreign inflows despite a narrowing yield differential with the US as the rupiah continues to stabilise, said Ms Teo.
However, she expects rising US yields, coupled with price pressures and fiscal concerns, could lead to more rate hikes ahead by the Indonesian central bank.
More broadly, the combination of higher global yields, energy costs and the AI investment boom could widen the divergence across Asia, with economies benefiting from the AI and semiconductor boom faring better than energy-importing nations grappling with geopolitical tensions, higher energy costs, fiscal strain and foreign exchange pressures.
