(Bloomberg) — Emerging Asian bonds are turning more expensive, making them less attractive than their global peers if Donald Trump’s tariff policies turn out to be milder than feared.
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The yield spreads of South Korea, the Philippines, India, China, Malaysia, and Indonesia are all trading one standard deviation below their average of the last 12 months, according to Bloomberg-compiled data. That shows higher valuation than other EM markets such as Colombia and Mexico.
A more favorable trade outcome and easing Treasury yields would be positive for EM currencies, fostering a more conducive environment for cheaper bonds to attract foreign inflows and drive local yields lower.
“EM local yield spreads versus the US are already quite tight across many markets,” Goldman Sachs strategists including Kamakshya Trivedi and Danny Suwanapruti wrote in a note last week. “By contrast, valuation buffers are higher across LatAm. In the event of a more benign trade policy and market outcomes next year, we would expect the LatAm local rate complex to drive outperformance for the asset class.”
South Korea’s 10-year yield is trading about 140 basis points below 10-year Treasuries, which is 2.5 standard deviations below the average spread of the last 12 months. The Bank of Korea surprised markets with a 25 basis point-rate cut on Thursday, against expectations for a hold.
In comparison, Mexico’s yields are 0.4 standard deviation above the one-year average gap, indicating a higher valuation. The same spread for Colombia’s bonds is also close to the one-year mean.
A significant amount of trade-related fears has been priced in, and “flows to EM assets could rebound” if some of the risks don’t ultimately materialize, the Goldman Sachs strategists wrote.
Trump has previously campaigned on US tariffs as high as 60% on imports from China, and up to 20% on goods from other economies. But his recent nomination of Scott Bessent as Treasury Secretary was interpreted as a pick that hints at a more measured approach toward tariffs.
The market’s reading shifted again after Trump’s posts earlier this week, which vowed additional 10% tariffs on goods from China and 25% tariffs on all products from Mexico and Canada.
“I would take his threats of tariffs seriously, though also mindful that his starting position is likely negotiable,” said Alvin Tan, Singapore-based head of Asia FX strategy at RBC Capital Markets.
