Asian markets extend rally as traders assess US Treasuries pledge

Asian markets experienced a slight increase on August 21 as investors analyzed the US Treasury's decision to lower long-term bond yields. Treasury Secretary Scott Bessent assured markets that he had additional tools to offer support, although this did not alleviate concerns among Wall Street investors. Sceptics on the market continued to sell, driven by worries over high inflation, government borrowing, and the unresolved Strait of Hormuz.

Oil prices have been gradually rising over the past two weeks due to the ongoing conflict between the United States and Iran.

The US Treasury announced its intention to "at least double" its sovereign bond buybacks, following a surge in the 30-year yield to levels last seen in 2007 just before the global financial crisis. This move resulted in a decline in long-term rates, but they rebounded by the end of the trading day. Analyst Mark Malek of Muriel Siebert & Co. described this as a "housekeeping move destined to be short-term, at best."

Bessent stated that his department possesses a comprehensive "toolkit" to tackle rising yields, which are deemed unmoored to financial conditions. This may include increased bond purchases beyond the scale previously announced. Bessent believes that the yields do not accurately reflect the market's underlying fundamentals. He further believes that inflation, which has exceeded the Federal Reserve's 2% target for over five years, will decrease once the United States exits the Iran conflict and oil prices fall.

US markets, particularly tech firms heavily reliant on debt for large investments, suffered from the rise in yields. However, Asian markets performed relatively better, with Seoul benefiting from a rally in chipmakers Samsung and SK hynix. Samsung announced a potential shareholder return of up to US$79 billion, while SK hynix soared over 12% following its US$29 billion share buyback. Hong Kong, Singapore, Wellington, and Taipei also rose, although Tokyo, Sydney, and Shanghai experienced declines.

In the currency markets, the yen appreciated against the dollar following an uptick in Japanese inflation due to higher oil prices stemming from the Middle East crisis. This provided Japan's central bank with room to raise interest rates next month. Analysts attribute the spike in yields to various factors, including increased government spending commitments and the surge in corporate bonds, particularly in AI infrastructure, such as those issued by Amazon, Alphabet, and Meta.

Fed Chair Kevin Warsh's reluctance to provide market guidance on the bank's plans has also contributed to uncertainty on trading floors. Traders will be watching his speech at the upcoming annual meeting in Jackson Hole for more clarity on monetary policy.