Concerns about inflation may keep U.S. Treasury yields at higher levels for a longer time, impacting both the financing and profit aspects of public companies to varying degrees, exacerbating the recent sell-off in Asian stock markets.
Earlier this month, the MSCI Asia Pacific Index fell nearly two percentage points relative to the yield of 10-year U.S. Treasury notes, marking the fourth occurrence in the past 12 years. Asian stock markets declined in the two months following the first three instances.
The Federal Reserve's determination to curb inflation by raising borrowing costs, along with the U.S. Treasury market funding the ever-expanding U.S. budget deficit, have collectively driven up U.S. Treasury yields. Since early last year, the Federal Reserve has raised the benchmark interest rate by more than 5 percentage points, intensifying concerns over a potential economic recession and corporate earnings damage.
Strategists at Nomura Holdings Inc., including Chetan Seth, express concerns over the continuous rise in U.S. borrowing costs and the risk of credit default events it might foster. Such risks pose a threat not only to the U.S. economy but also exert a negative drag on Asian capital markets.
The yield on 10-year U.S. Treasury notes has climbed more than 70 basis points from its low point in April, driven by various factors, including U.S. inflation data for July to be released on Thursday, and the resurgence in energy and food prices. A key bond market indicator measuring U.S. inflation expectations has rebounded to a 9-year high, indicating concerns that the Federal Reserve might have to tackle price pressures in the coming years.
Asian stock markets face greater downward pressure as investors cut their positions in tech stocks, including semiconductors, and Chinese stocks. Central bank rate hikes particularly harm technology companies, as rising rates not only increase their financing costs but also eat into their profit forecasts.
This month, the rise in U.S. Treasury yields has boosted the performance of the dollar, which adversely affects international investors holding Asian stocks. Data show that, last week, institutional capital withdrew $2.2 billion from emerging Asian stock markets, excluding China, marking the largest net outflow since March.
Under the impact of multiple adverse factors, including international capital outflows, heightened expectations for further Federal Reserve rate hikes, and the strengthening of U.S. Treasury yields, Asian stock markets performed poorly in August, with nearly all major indexes experiencing declines. Among them, the MSCI Asia Pacific Index declined on 7 out of the past 8 trading days.
