NEW YORK \u2013 US Treasury yields are pressing against their highest levels since 2007, and Asia\u2019s policymakers know what that usually means: turbulence ahead.<\/p>\n
This week\u2019s $42 billion auction of 10-year notes cleared at 4.683%, the richest yield since the eve of the\u00a0global financial crisis<\/a>. Investors are demanding higher yields to fund Washington\u2019s borrowing as the national debt approaches $40 trillion \u2013 and President Donald Trump\u2019s repeated intrusions into the Federal Reserve\u2019s independence only sharpen unease in Tokyo and Beijing, the two largest foreign holders of US debt.<\/p>\n Asia sits squarely in the blast radius of any Treasury market shock. In 1997, 2007, and 2013, surging US yields hit export-dependent, dollar-reliant Asian economies hardest, and there\u2019s little reason to think this cycle breaks the pattern.<\/p>\n A few strong auctions don\u2019t guarantee durable demand for long-duration US debt, warns Michal Stanczy of Allspring Global Investments. The mechanics are familiar: Capital rushes into dollars, Asian currencies slide, exports slow, inflation edges up, financial conditions tighten and central banks are forced to raise rates they\u2019d rather avoid.<\/p>\n The 1997 Asian financial crisis traced back to the Fed\u2019s 1994\u201395 tightening, when Alan Greenspan doubled short-term rates within a year; the resulting dollar surge shattered Asia\u2019s currency pegs and forced Thailand, Indonesia and South Korea into IMF bailouts. The 2013 \u201ctaper tantrum<\/a>\u201d produced Morgan Stanley\u2019s \u201cfragile five<\/a>\u201c: Brazil, India, Indonesia, South Africa, and Turkey.<\/p>\n What\u2019s different in 2026 is the mix of triggers stacking on top of a familiar dynamic \u2013 elevated oil prices and risk premiums after the Iran war, a fresh round of Trump tariffs against allies and rivals alike, a pressure campaign against the Fed that injects a kind of policy uncertainty rarely seen in a G7 economy and artificial intelligence exuberance propelling stocks skyward.<\/p>\n Despite swelling debt, sticky inflation, and an active trade war, the dollar keeps climbing anyway.<\/p>\n Topping the list of this year\u2019s currency casualties are Indonesia\u2019s rupiah and India\u2019s rupee,\u00a0down 7.2%<\/a>\u00a0and\u00a06.2%<\/a>\u00a0year to date, as capital that might otherwise support local markets instead pours into US assets. AI-driven volatility is compounding market stress from Seoul to Tokyo to Shanghai, where valuations had climbed on AI optimism. Moody\u2019s Analytics expects the turbulence to outlast the initial shock.<\/p>\n The Fed, meanwhile, is now a wildcard.\u00a0<\/strong>US hiring cooled sharply \u2013 payrolls fell by 23,000 in July, with 103,000 jobs erased through revisions \u2013 giving the Fed room to hold steady. PNC\u2019s Kurt Rankin says the report strengthens the case for staying put as inflation pressure eases.<\/p>\n Citigroup\u2019s Veronica Clark sees little sign that higher input costs are reaching consumer prices, though a rebound is possible in August. New Fed Chair\u00a0Kevin Warsh<\/a>\u00a0was appointed on the expectation he\u2019d steer policy toward aggressive rate cuts, but the data haven\u2019t cooperated, and he hasn\u2019t bent to Trump\u2019s preferences so far.<\/p>\n Having watched the Powell-era standoffs up close, Warsh appears intent on keeping the Fed independent rather than remaking it into a more pliant institution \u2013 though that resolve may be tested if job growth keeps cooling and markets grow more volatile. Six months out, nobody knows for certain where he lands, or how Trump reacts if his own pick doesn\u2019t deliver.<\/p>\n Yet with many Fed board members more focused on upside\u00a0inflation risks<\/a>\u00a0than worries about slowing growth, Warsh could face an unruly mutiny if he tried to pivot back to rate cuts. \u201cOur base case remains for the Federal Open Market Committee to hike in December,\u201d says Britney Jackson, economist at BNP Paribas Securities. \u201cRisks to our call are for an earlier move.\u201d<\/p>\n Meanwhile, the Bank of Japan\u2019s glacial pace of hiking rates above 1% is weighing on the yen and undercutting last month\u2019s joint US-Japan intervention meant to support it.<\/p>\n Defending a currency takes sustained firepower and a credible commitment to raise rates, argues BlackRock\u2019s Rick Rieder \u2013 something markets aren\u2019t yet pricing in from the BOJ: \u201cYou\u2019ve got to get monetary policy to a place that people believe that you\u2019re going to raise the rate,\u201d he tells Bloomberg.<\/p>\n Tokyo\u2019s benchmark rate remains far below the Fed\u2019s 3.5%\u20133.75% range, even as Prime Minister Sanae Takaichi\u2019s government \u2013 once dismissive of\u00a0higher rates<\/a>\u00a0as \u201cstupid\u201d \u2013 appears to be coming around to the idea.<\/p>\n As the yen flirts with 40-year lows, the rupiah has dropped below levels seen in the 1997\u20131998 crisis as Jakarta and Bank Indonesia scramble to stem outflows. UOB Kay Hian\u2019s Suryaputra Wijaksana says the US-Iran war is materially straining Indonesia\u2019s external accounts, a pressure likely to persist through year-end.<\/p>\n Indonesian President Prabowo Subianto\u2019s twin fiscal and current-account\u00a0deficits<\/a>, paired with inward-looking policies since taking office in October 2024, have left the economy exposed just as global risk appetite fades. The political weight is heavy: Prabowo is a prot\u00e9g\u00e9 of Suharto, the dictator toppled in 1998, and his successors \u2013 most notably Joko Widodo \u2013 spent 25 years repairing the damage.<\/p>\n Prabowo\u2019s ouster of respected Finance Minister\u00a0Sri Mulyani Indrawati<\/a>\u00a0in September 2025, followed by greater state intervention and central bank meddling, rattled investors enough that index giant MSCI is now considering a downgrade of Indonesia from developing to frontier market status.<\/p>\n Last month\u2019s sudden departure by BI Governor Perry Warijiyo for \u201cpersonal reasons<\/a>\u201d hardly helped. The rupiah bears are likely to believe it least of all \u2013 fueling fresh fears about central bank\u00a0independence<\/a>. That, with Oxford Economics\u2019 Artie Lam counting the country among those facing the most pressure to rein in spending as currency and yield moves erode its fiscal space.<\/p>\n India\u2019s\u00a0Goldilocks story<\/a>, meanwhile, is unraveling. A weaker rupee is driving up the cost of oil and other imports, fueling inflation and pushing investors toward the exits, while dollar-denominated debt becomes more expensive to service. The rupee \u2013 Asia\u2019s worst performer in 2025 \u2013 has fallen further, trading around 95 to the dollar.<\/p>\n The February 28 US-Israel strike on Iran and the oil shock that followed were unforeseeable, but Prime Minister Narendra Modi\u2019s government has had more than a decade to address the deficits that turned an external shock into a broader crisis.<\/p>\n Washington\u2019s own math is making things worse. This year the US crossed a dubious threshold: US$1 trillion in\u00a0annual interest payments<\/a>\u00a0on federal debt, which the Committee for a Responsible Federal Budget now calls the \u201cnew norm\u201d as debt climbs to 100% of GDP. As the Trump administration ramps up issuance to cover widening deficits, it needs its biggest foreign creditors to keep buying \u2013 and those creditors sit mostly in Asia.<\/p>\n Japan holds nearly US$1.2 trillion in Treasuries; China holds\u00a0US$659 billion<\/a>. That raises an uncomfortable question: why would Tokyo or Beijing continue to increase exposure to US debt at such a precarious moment? Tradition is one answer \u2013 major trading economies need dollar reserves \u2013 but Washington\u2019s fiscal trajectory gives both governments reason to hesitate, and any sign of that hesitation could ripple unpredictably through\u00a0global markets<\/a>.<\/p>\n Leverage questions abound.<\/strong>\u00a0Asia\u2019s Treasury holdings have long attracted speculation about their use as leverage. Morgan Stanley MUFG economist Takeshi Yamaguchi has raised the question of whether Japan might treat its holdings as a bargaining chip. This echoes former Finance Minister Katsunobu Kato\u2019s comment last May that everything on the table should be considered leverage \u2013 and reaching back to 1997, when Prime Minister Ryutaro Hashimoto told a New York audience Japan had been tempted to sell large volumes of Treasuries to make a point during tense auto trade talks.<\/p>\n