Emerging market government bonds are getting challenged by high DM yields and return of USD strength. Most of the EM Asia currencies have depreciated 1–3% against the USD over the past month, while government bond yields like KTBs and IndoGBs have risen sharply. For the short-end yields, further downside remains limited despite stable inflation. Asia central banks continue to preserve policy flexibility to buffer against FX shocks. The BOK, BNM, and RBI appear close to the end of their cutting cycles with only one more cut in sights. Central banks with lower yielding govvies may find the nominal rate a tad too low. In this context, the PBOC is easing at a more moderate and calibrated pace.
At the long end, EM Asia rates look less compelling. Yield spreads versus DM markets have been largely neutralised, and inflows into EM bonds have slowed. Rising term premium in DM markets also pose spillover risks. The US is gearing up additional fiscal spending under the “One Big Beautiful Act”, Japan is pressing ahead with a JPY21.3trn stimulus package, and Germany is expanding infrastructure and defence outlays. These lift DM yields and reduce Asia’s relative appeal.
In fact, fiscal pressures are also emerging within Asia. India’s weaker-than-expected revenue growth calls for spending cuts. Korea’s new government shifts toward a more expansionary fiscal stance, resulting in rising bond supply. Its fiscal deficit is projected to widen to 4.0% of GDP from 2.8%. On a brighter note, index inclusion related inflows may help absorb part of the increase.
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