Transcript
Speaker: Hello from Hong Kong and a warm welcome to Under the Banyan Tree. It's Fred and Harold back here in the studio and ready to put Asian markets and economics in context. Indeed, Fred. We've got a topical one for you this week. We're looking at US Treasury yields and what the recent market volatility could mean for Asia.
Speaker: That's right. We've seen some big wobbles sending ripples across the region. What could this mean for Asian Central Banks, FX trade and more? Equities as well, yeah. Well, equities, of course, and all that coming your way right here under the Banyan Tree.
Speaker: So just to cover the basics before we get going, a US Treasury is a bond issued by the US government. So when you buy one, you're essentially lending money to the US government. In return, the government promises to pay you back that money plus interest at a later date. That date could range from less than a year to as much as 30 years in the future.
Speaker: And in case you haven't been following the US Treasury market recently, August has been a particular volatile month. And there are a few reasons for that. On the one hand, there fiscal concerns. Does the U.S. s government need to borrow more and more money to actually pay for their borrowings? But also inflation, higher oil prices, all of which push these bond yields higher. And on the other hand, yields were actually pushed down sharply when the U.S. government announced that it would double the amount of treasury bonds that it is buying back from investors, which will now be worth $1. at least $4 billion dollars for each of these buyback operations.
Speaker: Why did they do that? Because long-term yields had reached levels not seen for nearly 25 years, making it much more expensive to borrow money over longer periods. So that's the big picture from the US s perspective. But we're here to talk about Asia threat. So kick it off.
Speaker: How does it impact your views here? Well, the US Treasury market sets essentially the funding costs for the rest of the world. It is by far the biggest financial market on the planet. It is. And so when you see interest rates rise in the U.S., which technically means that the bond yields are rising in the U.S. Treasury market, that, of course, pushes up the funding costs, not just for the American government and American companies, but but also for others globally you're borrowing. And this could be Asian consumers, this could be Asian companies, this could be Asian governments. And so there's a- And it goes into mortgage rates and it goes into everything, It goes into mortgage rates, exactly, yeah. So that is one implication we can think of. Another one is that the impact on the U.S. itself. Which also flows back into Asia. So imagine that treasury yields are rising, which means directly that mortgage rates are rising. Now, why is that important? In the U.S. it's because higher mortgage rates mean that U.S. consumers have less money left to spend on everyday items. And therefore, they're buying less of Asian goods produced in Asia. Yeah. And so there is a direct impact then that higher treasury yields could actually slow down Asia's exports to the U.S. And that's for the consumer angle. But there's another angle here. So many angles. So many angles. Another angle is that, well, at the moment, it's all about AI, isn't it? And so because a lot of the AI investment is funded by borrowing, if the cost of borrowing goes up, could this slow down the investment? And that would then impact not only Asian exports because we sell less to U.S. consumers, but we might also sell fewer chips and servers into the U.S. AI boom. And so you have economic angles as well as financial angles. And that's why...
Speaker: You probably saw over the past week investors and central bankers both with their nose glued to the through those screens watching what happens in the US. Just another angle just to throw into this mix is of course currencies. If the bond yields go high in the US, people buy the dollar because you get a higher yield there if you extend that, right? and well We've seen also movements in the yen and stuff like that. Is that linked to it? Yeah, so that's interesting you say that. so You know, what you learn in school um or a university is that, of course, U.S. interest rates go up, should be positive for the U.S. dollar, right? But you have to also ask yourself why are interest rates going up? And if interest rates in the U.S. are going up because of greater risk associated with lending to the U.S. government or perceived risk— That's that fiscal issue that we spoke about earlier on. They borrow so much that they have to borrow to finance their borrowings. Yeah, exactly. So so the interest rates might go up because there's more risk and therefore that's not necessarily good for the US dollar then. So there could be a ah potential where actually rising interest rates in the US s are not necessarily good for the US dollar because they signify some sort of, you know, macro imbalance in the fiscal accounts and so forth. So that's why the FX implications aren't quite clear. We have to see and we defer to our FX strategies, of course, on that. But it does mean for Asian Central Banks, for example, that there could be a lot of FX volatility come through because if the US s Treasury market is volatile and that's the biggest financial market in the world, then everything else will be quite volatile including FX and local rates and so everything. um yeah I have a question for you now because you and I have a couple of things in common. One is we like financial market and economic history. and Secondly, in the 1990s, we were both in Asia as poor backpackers. You in Thailand, me in Indonesia. If I think about bond yields rising and quite dramatically in the past, What happened very often is that that really disrupted markets. In 2008, we had ah bond yields rising. and That caused a a crack in the US market at the time. It was about mortgages. But also in Asia, we have 97, 98, of course. We also had rising bond yields, right?
Speaker: and encourage volatility. so So that's interesting. The Asian financial crisis in 97, 98 was really an almost traumatic experience for anybody who lived through that. It was so disruptive economically. I lost my salary 95% of US dollar terms. I was paid in Indonesian rupiahs. So i was completely wiped out. so Still that trolley is still there. I hope you recouped some of those losses meantime. Still recovering working on that. Yes, still working. That's why you're still working. Exactly.
Speaker: So you know that that was a very traumatic event. And so very quickly when you see jitters in the U.S. bond market, some wobbles, interest rates going up, very quickly then the Asian investor mind wanders to that big event in 97. And because back then we had rising U.S. bond yields in the mid-1990s, And subsequently, you had financial stress in Asia. um And so the question we receive now even from some investors in the last few days is, oh, is there a real one? Could this happen again? Is there stresses? Right? you You go on immediately to to that potential risk scenario. So tell us.
Speaker: Well, actually, the fundamentals are completely different. What was interesting in the 1990s was that most economies in Asia were borrowing money globally to finance themselves. yeah Today, most Asian economies are actually lending money to the rest of the world.
Speaker: They have excess savings to lend to the rest of the world. And that makes you put in much different position because if you borrow money and interest rates go up, you get an economic problem. If you're lending money and interest rates go up, money are you're actually making money. Now, I'm not saying it's all good because your interest rates are going up. The dynamics are very different. The dynamics are much, much different. Now, that's true for most Asian economies overseas. Some economies in Asia, they're still borrowing on a net basis internationally. Indonesia is one of them, for that was example. One of your favorite countries. here yeah no i'd I'd love to be there, but um yeah um yes, but financially, I've lost a lot of my salary in those days there. And it's a country that needs foreign capital to grow, and they have to pay for that. So if one deal to go up, it's that's bad for them. That's absolutely the case. Yeah, so that's a bit of a risk to growth, whereas if you think about an economy like Korea, for example, that has is lending money to the rest of the world. So that that's different, right? And actually, I'm just thinking about this from a pure equity point of view. The mirror image for that is exactly how what what we see in equity markets. 20 years ago, the foreign investor was the investor in Asian markets. So bond yields go up. They said, we're going to sell everything and we're going to put it in the U.S. because we're going to get a nice yield there. And that would really have a tremendous impact like on all of these Asian markets. But now it is the locals that really are the biggest players in these markets in India, not in Indonesia so much, but in India and Thailand and in a place like Korea as well. And they are buying up that market. So we are much more stable. We have a much sort of better buffer, if you want to put it like that, to play with. Yes, they're much more stable. So that that's the message here. We're in a completely different situation. we in nineteen ninety s even if u s interest rates go up but let let me ask you this because it doesn't mean that We're
Speaker: government bond yields because Investors still globally have to weigh between investing equities and investing in bonds. And I guess higher bond yields is generally a headwind for equities. so It is a headwind for equities, but that doesn't mean that equities have to go down. So maybe just to explain this quickly, take a step back. And I think I've done this in the past before. The way to think about equities is like a tug of war of two parties. And with the talk of war, you've got these two parties that pulling on this rope. But to really understand what what direction it's going to go to, you've got to understand the two parties that pulling at it. If one party is much stronger, then you say, oh, they're going to win. And if the other party's got three friends coming in, they're going to pull as well. you think, oh, they're going to win, right? Now, these two parties is basically earnings growth and bond yields. If bond yields go up, they pull the market down. They pull the market in one direction. But if earnings go up, they pull the market in the other direction. Now,
Speaker: We now are in a situation where we have unprecedented growth in emerging markets in general, in Asia in particular. You mean when you say unprecedented growth in earnings? In earnings growth, yeah, because I'm talking about equities, I'm talking about the companies listed, and that can be very different than what happens in these countries. the earnings growth in is now unprecedented. At the beginning of this year, the earnings growth in Korea was expected to be 50%, which is already very high. Normally, we grow 10% to maybe 15%. That's good. 20% is good. 50% is really good. That was at the beginning of the year. Now, for the same calendar year, 2026, the forecast says we're growing 320%. Wow, that's huge. I've never seen this, yeah. But let me ask you.
Speaker: How much is that, though, contingent really on the boom in AI? And is there then a risk that if interest rates rise so much that companies can no longer afford to invest in data centers, et cetera, that actually that then feeds into earnings as well? Yes, and a little bit of no as well. You could be an economist with a yes and Exactly. On the one hand and on the other hand, right? Yeah. But the situation is, yes, if bond yields go up, the financing of these data centers, and we know that's about a trillion dollars around the world, becomes more expensive and people might scale it down. You don't need as many chips.
Speaker: The good thing is that, first of all, the chip makers get paid. So a lot of the data centers are still hoping that people pay for their products and the the apps that people start to use and the AI, but they get paid already. So they get an enormous amount of cash already coming in and they're starting to pay that out in dividends. And secondly, the demand for that chips is so big that even if there's a scaling down of the investment plans by these data centers, actually demand for these chips still remains pretty good. There's too much demand. I can't deal deal with it anyway. So for the first time in a long time, actually, Asia is in a sort of a sweet spot here. whereby If there is a slowdown, we're in the right corner here. We get paid in Asia, at least the Asian companies get paid, and the demand for the product is so strong that yeah we have we have a bit of a buffer to play with. See, and Harold, that's why were a centralist podcast because you bring a dose of optimism into into this gloomy economics analysis that I usually provide. I forgot the title, The the Power of the Optimism or Something. I read it a long time ago, but there's a book written about if you're not optimist. written you, is it? No, but I should write it, actually. But it's about looking at the US market over the last 100 years and how actually just being optimistic would have been and just not doing anything at all actually was the best sort of investment strategy. Yeah. The question though is what happens over the next 100 years, Harold? And that's a much tougher question to Well, I stay optimistic and then ask me in 100 years time, I won't be ah won't be around anyway. Well, folks, you heard it from an optimist and a pessimist and we'll let you decide which way you lean. This is it. Well, yeah, that's a wrap, folks. Hopefully that's brought you a clearer understanding of what those ripples in the US Treasury market can mean for markets and economies here in Asia.
Speaker: Yes, and we'll be back putting Asian markets and economics in context same time next week. Listen, like and subscribe wherever you get your podcast. Under the Banyan Tree is an HSBC Global Investment Research production and our producer is Graeme Mackay.
Speaker: Thanks for listening and talk to you again next week.
