Global Bond Selloff Threatens Turmoil in Weakest Asian Economies

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(Bloomberg) — Three of Asia’s most vulnerable economies are showing rising strains as their central banks come under pressure to tighten policy even as the economic hit from the Iran-war oil shock deepens.

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Indonesia, the Philippines and India are already grappling with capital outflows and free-falling currencies as Middle East tensions hurt consumers and companies alike. Now, global bond ructions are piling on further pressure.

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Higher US bond yields drive up the dollar and reduce the appeal of emerging-market assets, fueling capital outflows from Asia. That raises the burden of servicing dollar-denominated debt and pressures central banks to raise interest rates to defend their currencies and boost the appeal of local debt, even as domestic growth is set to weaken — leaving authorities in a catch-22.

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“Growth in much of the region is set to come under greater pressure, leaving central banks in a bind whether and how to respond to soaring price pressures,” said Frederic Neumann, chief Asia economist at HSBC Holdings Plc. “The going may get tougher still. We are not out of the woods yet.”

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Elevated oil prices and inflation concerns have pushed government bond yields around the world to multiyear highs, with 30-year Treasury yields climbing above 5% and nearing their highest levels since 2007.

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The jump in US yields has intensified pressure across emerging Asia. Aside from China’s yuan, all major Asian currencies have weakened since the Iran war, with the Philippine peso, Indian rupee and Indonesian rupiah among the region’s worst performers. A Bloomberg index of Philippine bonds has lost 13% for dollar-based investors, the steepest decline in emerging Asia.

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Bank Indonesia is widely expected to raise interest rates on Wednesday after stepping up intervention to defend the rupiah, which has plumbed new record lows.

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“Even that would provide only brief respite though,” said Jason Tuvey, deputy chief emerging markets economist at Capital Economics. “Putting the currency on a more solid footing ultimately requires the authorities to shift away from the populist and interventionist policies adopted since President Prabowo came to power.”

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Bank Indonesia has been buying up long-term bonds in a bid to bring down yields, while selling short-term paper to lure more inflows to underpin the currency. That’s akin to the “Operation Twist” it introduced in 2022, when the central bank tried to temper a sharp rise in borrowing costs following the Covid pandemic.

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In the Philippines, traders and economists are increasingly discussing the possibility of a large or off-cycle rate increase should pressure on the peso intensify further. The government rejected all bids for Treasury bonds it auctioned on Tuesday to prevent a sharp rise in yields.