US capital flight a boon for Asia

As global investors consider reducing their exposure to US financial assets, the key question is where money flowing out of the US will go. While Europe may be the obvious destination, relative value metrics may favour emerging Asia.

- Manishi Raychaudhuri

Even though US equities have recovered from the steep losses suffered in the week following US President Donald Trump's announcement of his “Liberation Day” tariffs, the same cannot be said of the US bond market. Since hitting a recent low on April 4, the 10-year Treasury yield has spiked by around 50 basis points, with bond investors demanding more compensation for the risk of holding longer-dated US debt. Worryingly, the benchmark Treasury yield has surged higher than nominal US GDP growth — a key risk measure.

Additionally, the usual positive correlation between Treasury yields and the US dollar has broken off, as rising yields are no longer attracting money to the “safest” asset in the world. Broad-based depreciation of the greenback suggests that — despite the equity rebound — many US assets are being sold and the funds are flowing into markets whose currencies are appreciating.

The euro’s almost 10% rise against the dollar this year suggests that a significant portion of the capital flowing out of the US is going to Europe.