- US bond yields have risen, and bids are on the weak side.
- But greater stress is evident in Germany, Japan, and the UK.
- In Asia, South Korea’s bond market has turned volatile.
- China appears to have several layers of insulation; its bonds remain well bid.
- Singapore continues to benefit from safe haven flows.
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Commentary: War and bonds
Wars cost money, raise fiscal deficits, and test the market’s ability to absorb the additional public sector issuances. The macro spillovers from regional hostilities can make it a matter of global consequence, as seen presently. The war may be in the Middle East, but global bond markets are demonstrating its far-reaching implications vividly.
Most attention is provided to the US bond market, given its massive scale, where 10-year yields are the highest since January of last year. But US yields are still considerably lower than the peak of late-2023. By contrast, the highs hit last week were a near three-decade record for Japan, near two-decade record for the UK, and a 15-year record for Germany. The markets are saying the fiscal positions of these nations are likely to worsen considerably in the coming years as energy and defence bills come due, just as they would have to reckon with mounting aging, entitlement, and infrastructure related spending. The bond yield spike may be the result of a specific, short-term development, the underlying negative narrative is one of long-term, structural nature.
Asia’s bond markets are also on the move, although the action has been differentiated, demonstrating varying degrees of vulnerability. High yielders like India and Indonesia have seen their bond yields climb, but nothing as dramatic as their Western counterparts have demonstrated. South Korea’s bond yields reflect relatively greater stress and volatility. Then there are the likes of China and Singapore. China, despite being a major importer of fuel from the Middle East, is characterised by several layers of insulation. They include substantial strategic reserves of oil and coal, ability to extract oil and gas shipments through the Straits of Hormuz due to its favourable relationship with Iran, access to supplies from Russia, flattening or declining energy intensity of production, and the world’s largest green energy ecosystem. Consequently, global investors’ considerable interest in Chinese bonds will persist, in our view. As for Singapore, yields may have bottomed, but safe haven flows will likely continue. An economy with deep financial buffers and long-term policy orientation can navigate through uncertain times like the ones prevailing now.
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