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USD and Asia rates: Rising inflation poses renewed headwinds to Asia govvies
Headwinds to Asian bonds,
Group Research - Econs, Samuel Tse13 May 2026
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    Expectations of persistently elevated oil prices are driving a renewed rise in USD rates and a stronger DXY. The 2Y UST yield has climbed to 4.00%, its highest level since June 2025, while the 10Y yield is approaching 4.47%. US inflation data for April surprised to the upside. Headline CPI rose by 0.6% MoM, with annual inflation accelerating from 3.3% YoY in March to 3.8%. Core CPI likewise came in above market expectations, rising by 0.4% MoM. Importantly, the acceleration was not solely driven by food and energy prices, but also reflected broader underlying price pressures including core services. Meanwhile, AI-related supply bottlenecks have continued to push IT goods prices sharply higher. Rental costs continue to rise, although part of the increase appears to reflect a one-off adjustment linked to anomalous data omitted during the October government shutdown. Against this backdrop, inflation expectations have continued to reprice higher. The 1Y breakeven inflation rate has rebounded from 2.98% last week to 3.23%. In turn, this is likely to constrain the easing cycle under the Warsh-led Fed.

    Higher inflation environment is creating fresh headwinds for Asian rates markets. Benchmark 10Y government bond yields across Asia have generally moved higher over the past week. Nevertheless, this is not particularly concerning in our view. Spreads versus USTs have continued to tighten, suggesting that Asian local rates are still outperforming on a relative basis. From a total return perspective, CNY and MYR-denominated bonds should remain among the regional outperformers, supported by FX strength.

    CGB yields have continued to decline as USD/CNY strengthened beyond 6.80 for the first time since February 2023. China’s domestic inflation dynamics remain relatively insulated from energy price volatility, thanks to its more diversified energy mix. CPI rose only modestly by 1.2% YoY in April, while PPI accelerated to 2.8%. The PBOC is likely to maintain ample liquidity conditions to cushion the adverse impact of higher energy prices on domestic demand. Optimism over potential trade deal during the Trump-Xi meeting this week also support the RMB strength.

    Likewise, MGS-UST spreads have tightened further, underpinned by still-resilient macroeconomic fundamentals. In particular, as a net exporter of oil and gas, Malaysia is structurally better positioned than many regional peers to absorb external energy shocks. Moreover, Malaysia stands to benefit from the ongoing AI-driven technology export cycle. As such, we expect BNM to remain on hold rather than hike rates aggressively to defend the currency, suggesting limited upside pressure on MGS yields.

    We remain more cautious on high-beta government bond markets such as KTBs. To be sure, Korea remains one of the key beneficiaries of the global AI investment cycle, with electronics continuing to anchor exports and support asset markets. However, Korea’s heavy dependence on Middle Eastern oil — which accounts for roughly 68% of total oil imports — remains a key vulnerability. CPI has already accelerated from 2.0% YoY in February to 2.6% in April. Won weakness could intensify import inflation. Against this backdrop, the BoK is expected to deliver another rate hike in 3Q. Investors are also closely monitoring policymakers’ comments regarding the proposed “Citizen Dividend” linked to AI development, despite subsequent clarification.

    The performance of higher-yielding INR and IDR bonds remains more vulnerable to FX volatility. Indonesia’s 10Y government bond yield has risen by 11bps over the past week after retreating from the 6.90% peak reached at end-April. Consolidation in the equity market remains a key concern for policymakers. Bank Indonesia has continued to support the rupiah through a range of measures, including tightening limits on foreign currency purchases and allowing SRBI yields to rise further. Similarly, the RBI has implemented several non-policy measures and has reportedly explored the potential sale of foreign currency bonds via state-owned banks. The resulting tightening in domestic liquidity conditions is contributing to upward pressure on IGB yields.


    Samuel Tse 謝家曦

    Rates Strategist - Asia 利率策略师 - 亚洲
    [email protected]


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