- US policy rate cuts have been accompanied by rising long-term interest rates.
- Long-rates in Germany and Japan have also been on the firmer side.
- Curve steepening in these markets reveal a lack of comfort among bond investors.
- Asian bond markets, meanwhile, have enjoyed a rally.
- We expect the outperformance of Asian bonds to continue.
Commentary: Shifts in the global debt market
Global growth momentum is waning, which is typically accompanied by a lower return on capital, and by extension, lower interest rates. One part of that dynamic is visible in recent data. Having fought inflation hard in 2022/23, global central banks began lowering short-term interest rates from 2024 onward, not in reaction, but in anticipation of slowing economic growth. Inflation concerns abating somewhat was also a part of the rationale.
But another part of the dynamic is not playing out among large, industrialised economies. Through the rate hike and the subsequent rate cut cycle, long-term interest rates have kept climbing higher. Most tellingly, US 10-year bond yield has risen by more than 50bps since the rate cut cycle began in September 2024.
We see similar pictures in Germany, Japan, and the UK. Japan’s situation is somewhat different, where the Bank of Japan is on an on-again, off-again path of interest rate normalisation, after decades of unconventionally easy monetary policy. Germany and the UK, meanwhile, reflect factors similar to the US—waning economic growth momentum, rising fiscal burden, and increasing concerns about the policy resolve or cohesion to deal with prevailing macroeconomic imbalances.
Curve steepening, as opposed to flattening, during a rate cut cycle is problematic. They reflect the market’s scepticism about policy efficacy. Is inflation about to return? Will fiscal metrics keep worsening? Is there going to be sufficient demand for the large-scale debt issuance in the pipeline? Is the debt issuing nation showing signs of institutional erosion? These questions appear to be weighing in, with some variance, on several DM bond markets.
Key debt markets in Asia are devoid of such headwinds presently. Long-term rates are on a declining path, with no major concerns regarding inflation fighting credibility of central banks or public sector debt sustainability. The exchange rate outlook is supported by geopolitical factors and favourable external flows. For global bond investors seeking superior absolute returns, Asia has been rewarding. We expect the trend to persist.
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