Treasury yield surge pushes spreads with emerging Asia bonds to extremes

The US 10-year Treasury yield climbed 16 basis points on September 23 to reach 5.11%, a level not seen since 2007. What makes it genuinely alarming for a large swath of global bond investors is the collateral damage: yield differentials between US Treasuries and local-currency sovereign bonds across emerging Asia have blown out to near-record extremes. Malaysia’s 10-year bond now trades at its widest discount to US Treasuries since 2007. Indonesia and Thailand are flirting with similar historical lows. Why US yields keep climbing The drivers are familiar but relentless: persistent inflation concerns, elevated oil prices, and expectations that the Federal Reserve will keep monetary policy tighter for longer than markets previously assumed. Add in soft demand at recent Treasury auctions, and you get a self-reinforcing cycle of rising yields. Strong US economic growth data has made the situation worse, paradoxically. Robust output numbers give the Fed less reason to cut rates, which keeps the yield curve elevated. Back in August, investors flagged that a sustained 5% on the 10-year could trigger meaningful capital outflows from emerging markets. The last time pressure like this materi...