US yields are rising mostly due to expectations of higher growth, rather than fears of imminent tightening, or monetary-policy shock. This time around, initial conditions in Asia are sturdier than they were in 2013, the rating agency said.
It said current account surpluses, low inflation (for the most part), higher real interest rates, and fatter foreign-exchange reserve buffers give regional policymakers more flexibility and should allow central banks to remain focused on supporting recovery.
“The recovery across Asia’s emerging economies should withstand rising US yields so long as this reflects an improving growth outlook and reflation rather than a monetary shock,” S&P Global Ratings Asia-Pacific Chief Economist Shaun Roache.
The US-based agency, however, said that if markets price a policy mistake and US real yields surge higher, risks of a ‘taper tantrum’ rise, with India and Philippines most exposed.
In 2013, US yields leaped after the US Federal Reserve indicated it would begin unwinding its quantitative easing program. The resulting panic over rising credit costs led to sharp outflow from emerging markets, including Asia’s, and forced central banks to hike interest rates.
Since then, S&P said, the central banks in India and Thailand have been more aggressive in building up reserve buffers.
It said the effect of USD 1.9 trillion in stimulus on US inflation and rates remains uncertain and markets can react in a non-linear way if inflation expectations surge above central bank targets and imminent tightening is priced in.
“In this case, we may see real yields (rather than inflation expectations) jump and the US dollar appreciate at the same time. In our view, this would trigger disorderly capital outflows from Asia’s emerging markets. India and the Philippines are the most vulnerable at the current juncture,” S&P added.
