U.S. President-elect Donald Trump appears to have burst the bond bubble, putting emerging markets (EM) from Mexico to Indonesia at the sharp end of a sell-off.
Expectations of fiscal stimulus, infrastructure spending and reflationary policies under a Trump administration were fueling inflation fears, sending benchmark U.S. ten-year Treasury yields and the dollar surging. Expectations for tighter monetary policy and a December rate hike by the Federal Reserve were also playing a role.
In the wake of last week's election outcome, the U.S. 10-year Treasury yield climbed above 2 percent from levels below 1.8 percent in the days before the result, with many analysts pointing to expectations that Trump's promised policies would spur a resurgence of inflation and further interest rate hikes from the U.S. Federal Reserve.
That created a negative feedback loop for emerging market assets.
Indonesia's rupiah fell by as much as 3 percent against the dollar on Friday to five-month lows, hurting local stocks, with the declines extending on Monday. Malaysia's ringgit also fell to its lowest against the dollar since late 2015, near levels not seen since the Asian Financial Crisis in 1998.
Central banks last week in Malaysia and Indonesia intervened to support their currencies, while foreign investors have slashed holdings of sovereign EM bonds perceived as most risky.
Analysts were rejigging their outlook for Asian bonds.
"Asian fixed income assets have operated on a 'lower for longer' assumption' for U.S. rates since June," RBS economists led by Vaninder Singh wrote in a note on Friday. "This assumption is being challenged. High-yielding currencies will have to re-price to become attractive again."