Asian stocks rally as US Treasury steps in to ease bond fears

Asian markets experienced a significant rally on Thursday (Aug 20) following the US Treasury's announcement to double the long-term bond holdings, aiming to lower borrowing costs. This unexpected move provided much-needed relief for investors concerned about rising 10- and 30-year yields, driven by potential inflation, government borrowing, and possible Federal Reserve interest rate hikes.

Subsequently, US equities rebounded, ending the day higher, while the dollar weakened as traders welcomed the news after a period of selling.

The initial surge in yields, with the 30-year Treasury hitting its highest level since June 2007, had caused widespread worry. Neil Wilson of Saxo Markets suggested that the Treasury's move was more about signaling their stance on acceptable yields rather than its scale, as it represented a minuscule fraction of the US$40 trillion US government debt.

The positive market sentiment extended to Asia, where tech firms, reliant on debt for their substantial AI investments, had faced losses the previous day. Seoul's Kospi index surged over six percent, driven by SK hynix's US$29 billion share buyback, while Samsung climbed nearly nine percent. Other Asian markets, including Tokyo, Hong Kong, Shanghai, Sydney, Wellington, and Manila, also saw increased activity.

However, the lingering concern is whether the drop in yields will persist. City Index's Fiona Cincotta noted that if oil prices remain high and borrowing concerns continue, pressure on long-term Treasuries could resurface. The rise in oil prices followed fading hopes for a US-Iran deal to reopen the Strait of Hormuz, along with Iran's ongoing attacks on commercial ships and Iran's warning against assisting US military operations in the region.

The Federal Reserve's July meeting minutes revealed dissent among policymakers about the necessity of further interest rate hikes to combat inflation. Investors are now eagerly awaiting the Jackson Hole annual meeting to gauge Federal Reserve Chair Kevin Warsh's outlook on rates.