Asian bonds retain their appeal amid market pressure
A global bond selloff pushed Asian yields higher and tested both central bank resolve and the region's appeal amid a more challenging backdrop.
Since the start of the US-Iran conflict, government borrowing costs have risen on higher energy prices and fears of a prolonged inflation shock. The global bond selloff in August 2026 pushed benchmark sovereign yields higher across Asia, weighing on regional risk sentiment more broadly and overshadowing most local catalysts. Even so, underlying demand held up as carry trade inflows continued into higher-yielding debt, suggesting investor appetite for the region remained intact.
Bond Yields Rise Amid Inflation and Borrowing Fears
During the month, the 30-year US Treasury yield hit its highest level since 2007 on investor concerns about high borrowing needs to finance growing budgets, especially as many corporations launch large issues to cover spending.
The selloff intensified in the final week of the month after US Federal Reserve Chair Kevin Warsh's hawkish speech at the Jackson Hole Economic Policy Symposium, which pushed the odds of a September 2026 rate hike to around 60% from roughly 56%1. As a result, benchmark sovereign yields rose across most major markets, including Asia.
In particular, Japan saw its 10-year government bond yield surge to a 30-year high, as investors positioned for a possible Bank of Japan rate hike at its September 2026 policy meeting. South Korea's yield curve also steepened to its highest level since 2021, as long-dated bonds sold off in the broader global rout even as the Bank of Korea continued to tighten policy.
China was the exception, as government bond yields continuing to decline, with the 30-year yield reaching its lowest level since November 2025, as the People’s Bank of China (PBOC) remained supportive in the face of property market weakness and deflation.
Domestic Dynamics Remain Distinct
Even as bond yields rose, Asian central banks pulled in different directions. The Bank of Korea delivered a second consecutive 25 basis point hike, taking its base rate to 3.0%, as policymakers moved to contain inflation risks fuelled by stronger-than-expected growth amid a semiconductor-driven boom2.
Despite the peso reaching a new low, Bangko Sentral ng Pilipinas raised borrowing costs for a third consecutive meeting, bringing the policy rate to 5.0% and attesting that tightening alone does not ease pressure on the currency3.
By contrast, the Bank of Thailand held its policy rate, favouring an accommodative stance to support a fragile economic recovery.
Managing Currency Strength
For local currency bondholders, currency management is crucial as foreign exchange stability shapes the total return on unhedged bond positions. Central banks' efforts to steer their currencies are often also efforts to protect foreign appetite for their local debt.
In China, the PBOC continued its moves to slow the yuan’s appreciation after it reached its highest level against the US dollar in over three years. Meanwhile, Bank Indonesia maintained its benchmark rate at 5.75%, focusing on intervention and foreign inflow incentives rather than rate hikes to support the Indonesian rupiah4.
Instead of only intervening during severe market swings, the Reserve Bank of India pivoted to a more active strategy by selling dollars to support the rupee. It also held its repo rate steady, signalling it does not want the policy rate to be its first line of defence for the rupee. Its early closure of the Foreign Currency Non-Resident (Bank) deposit swap scheme, following US$52.3 billion in inflows, removed a source of near-term bond market liquidity even as it reflected the programme's strong take-up5.
Asian’s Favourable Carry Trade Demand
Despite the pressures outlined above, Asian local currency bond markets have continued to draw investor and issuer interest. The emerging market carry trade notched its longest winning run since 2008, as investors funded positions cheaply and earned the spread from higher-yielding ASEAN government bonds.
These trends suggest the region's underlying appeal as a source of diversification and carry even amid a challenging month for yields and currencies. That said, this is not without risk: a further US Treasury selloff or dollar rebound could dampen demand. More broadly, rising government borrowing needs add further strain to already stretched fiscal positions, making deficit reduction a harder task in a higher-rate environment.