US Yields Soar on Strong Data and Rising Oil Prices

The US Treasury yields rose sharply as strong economic data and rising energy prices fueled concerns about persistent inflation. The US 2-year yield jumped 14 basis points to around 4.9%, while the 10-year yield surpassed 5% and the 30-year yield climbed above 5.4%. Markets now price in 37 basis points of additional Fed tightening by December 2026, equivalent to roughly 1.5 rate hikes by year-end.

The catalyst for this move was a set of surprisingly strong US economic data. Manufacturing PMI rose to 57.0 in September from 53.9 previously, comfortably beating consensus expectations, while services PMI climbed to 58.7 and composite PMI reached 58.4. This economic resilience raises the risk that policymakers may need to do more to prevent inflation pressures from becoming entrenched.

The combination of stronger US growth, rising inflation risks, and higher oil prices has created a toxic combination for bonds, driving yields sharply higher across the curve. The US dollar extended its advance, with the DXY rising 0.5% and bringing cumulative gains since Jackson Hole to around 2.0%. Rising US yields and Fed tightening expectations have supported the US dollar, reinforcing a challenging external backdrop for Asia FX.

Most Asian currencies weakened against the dollar yesterday, led by KRW (-0.8%) and JPY (-0.6%), with some of the recent gains in these currencies now being partly unwound. The rupiah gained 0.4% against the dollar despite the stronger DXY backdrop. Bank Indonesia left rates unchanged at 5.75% but announced a reduction in hedging swap costs of up to 25% for portfolio investment hedges.