Long-end UST rally driven by extended bond buying was erased overnight. Treasury Secretary Bessent indicated that an upcoming fiscal consolidation plan could include setting up a fraud task force and cutting back some programmes allocated to states. However, fiscal woes could not be soothed. Public debt has surpassed USD40trn, or 130% of GDP, while annual interest payments reached USD1.2trn as of 2Q26. Elevated inflation also continues to cloud the outlook for long-end rates. The ongoing Middle East conflict is flaring up, with the US pledging to impose “the toughest sanctions in history” on Iran. The 2Y breakeven rate has risen to a two-month high of 2.32%, as Brent crude returns to USD94/bbl.
The implication on regional market is that rally in the long-end KTB and HKGB should take a pause. The ~5bps gain of the two govvies this week is largely driven by their high-beta and dollar-pegged nature respectively. The diverging fundamentals of the North Asian economies also suggest that CGBs should form the lower leg (lower yields) of the K-shaped North Asian government bond complex, while KTBs and HKGBs remain the upper leg (higher yields).
KTBs: Long-end KTB yields could resume their upward march. The bid-to-cover ratio for the 10Y KTB auction fell from 2.80x to 2.41x this week, pointing to softer investor demand. The Bank of Korea is expected to remain on track for two further rate hikes this year amid elevated inflation and still red hot property market. The KOSPI is once again testing the 7,000 level, alongside a return of foreign inflows. The bond market could also face increasing supply as both public- and private-sector issuers ramp up funding for AI development.
HKGBs: Accelerating infrastructure bond issuance should provide upward pressure on the long end yield. Corporate bond sales, including from quasi-government entities, has already reached a multi-year high of HKD120bn YTD. The equity market has also regained momentum, particularly following Chinese authorities’ approval for insurers to acquire Hong Kong ETFs. As of June 2026, 16% of CNY42trn of Chinese insurance capital, or around CNY6.4trn, was allocated to equities and funds. Increasing demand for HKD assets and growth expectation could therefore provide support to HKD rates.
CGBs: The anchored long-end CNY rates reflect a combination of weak domestic demand and RMB strength. July data released earlier this week pointed to continued weakness in loan demand. Fixed Asset Investment fell 6.7% YoY YTD. Outstanding loan growth slowed to a record low of 5.2% YoY. Government bond issuance has also slowed, as infrastructure investment has turned negative. New household loans have contracted amid early mortgage repayments. Rising corporate bonds and equity financing in the technology sector remains insufficient to compensate for the weakness in the old economy. Meanwhile, USD/CNY is heading towards 6.73 amid accelerating RMB internationalisation. Exporters are increasingly retaining trade proceeds in CNY, supporting inflows into China bond funds.
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