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How higher US bond yields will impact Asia Pacific bonds

As financial markets started pricing in stronger US economic growth and inflation because of Joe Biden’s stimulus plan, US bond yields have risen, causing ripple effects across the world, including in APAC.

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Following the rise in US bond yields in response to Joe Biden’s stimulus plan and amid higher inflation in some economies, Asia Pacific bond yields have risen significantly as well, especially in Southeast Asia, India, Hong Kong, and Australia. However, Northeast Asian bond yields have risen little.

The prospect of stronger growth and higher interest rates in the US has led to weaker APAC currencies. But as in the US, APAC stock markets have so far generally shrugged off the prospect of higher international bond yields (domestic reasons explain the weaker equity markets in China and Hong Kong).

As financial markets started pricing in stronger US economic growth and inflation because of Joe Biden’s stimulus plan, US bond yields have risen, causing ripple effects across the world, including in APAC.

While we expect further international bond yield increases to be modest, if US rates rise more substantially, yields in Southeast Asia, India, Hong Kong, and Australia will likely feel more upward pressure than those in China and Japan, while APAC exchange rates should depreciate further.

Stronger US economic growth prospects are the underlying reason for the market developments, so most APAC stock markets may keep holding up relatively well. In some Asian emerging markets, markets could come under downward pressure if “taper tantrum” type pressures become more significant, even though better fundamentals should prevent drastic responses.

Source : Oxford Economics Research Briefing

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