Dollar Weakness Spreads Chaos Through Sovereign Bond Markets

The weakening dollar is causing turmoil in sovereign bond markets, particularly for Korean and Chinese government bonds. According to recent data, the dollar value of Korea's treasury bonds increased by US$51.8 billion in August 2026, but only US$13.41 billion of that was new issuance, while the rest was due to foreign exchange (FX) impacts.

Three Korean treasury bonds were issued over the month, with a total value of US$3.68 billion. The weighted average price of these bonds has declined year-on-year from 97.7% to 86.67%, while yields have increased from 2.7% to 4.24%. This is in stark contrast to the recent spike in 10-year US Treasury yields, which hit a high of 4.8% on Wednesday.

The Korean won has appreciated by 13.3% against the US dollar since July 2026, reflecting a rare alignment of current account, portfolio flow and corporate FX dynamics, according to BofA Global Research analysts. This appreciation is partly due to Korea's government bonds being included in the FTSE World Government Bond Index (WGBI) in July.

A similar story can be seen in China, where US$16.82 billion in FX revaluation complemented an additional US$54.78 billion in new-issued bonds. The weighted average yield of Chinese government bonds has dropped from 1.79% to 1.59% year-on-year.