Fixed Income & Currency Outlook – August 2026
July was a tough month for bondholders everywhere. Yields on longer term government bonds surged, prices dropped, and near the end of the month, currency markets were rattled by an unusual joint move from two of the world’s biggest economies.
In the U.S., yields on Treasuries climbed across the board. The 10 year note closed out July at 4.745%, and the 30 year bond hit 5.28%, levels that have not been seen since 2007. The Federal Reserve’s late July meeting was the trigger. The Fed left rates unchanged, but gave investors little clue about the future, fueling concerns that inflation might stick around longer than expected. The yield curve steepened, a classic sign that inflation fears are growing.
Looking ahead, we believe more turbulence may be in store. JPMorgan has raised its year-end forecasts for 10 and 30 year Treasury yields, pointing to lingering inflation concerns and a growing term premium. Additionally, some fund managers, tired of the volatility, are reportedly moving funds from Treasuries into European government bonds instead.
Malaysian government bonds were not immune either. Foreign investors pulled back in July, but local bond auctions remained solid. Malaysia sold MYR3.5 billion of 15 year bonds at a 3.903% yield and MYR5 billion in three year Islamic bonds at 3.287%. Both drew strong demand, with bid to cover ratios above 2. The country also tapped the U.S. dollar bond market for the first time in five years, raising $1.5 billion to help fund infrastructure projects and refinance existing obligations.
Analysts think foreign selling will probably ease from here, thanks to Malaysia’s healthy public finances and relatively contained inflation. Bank Negara Malaysia has signaled the economy is set to hit the upper end of its 4% to 5% growth target for 2026, which could help restore confidence in Malaysian debt.
Currency markets in July kept investors on their toes. The U.S. dollar was strong for most of the month, but everything shifted when the U.S. and Japan joined forces in a dramatic effort to shore up the yen. For weeks, high U.S. yields had been pulling in foreign capital and bolstering the dollar. But the coordinated intervention changed the landscape, sending the dollar lower against most currencies.
The short-term outlook is unclear. Before the intervention, speculators had heavily bet against the yen, and unwinding those positions could keep the dollar under pressure versus the yen for a while. Still, with U.S. yields elevated and the Fed’s future moves unclear, the dollar probably would not weaken significantly against most other currencies in the near term.
Across Asia, most currencies stayed relatively stable. China’s yuan reached its strongest point against the dollar in three years, buoyed by subtle signals from Beijing in favor of a firmer currency. South Korea’s won also performed well, standing out among its regional peers.
The ringgit was flat all month, staying between 4.06 and 4.09 per dollar. That contrasts with its poor showing in June despite Malaysia’s strong fundamentals. Initiatives from Bank Negara Malaysia, such as urging companies to repatriate and convert overseas earnings, should continue to lend support. As August begins, the ringgit is expected to remain stable, bolstered by capital flow measures and healthy growth. But if foreign outflows from Malaysian bonds persist, the ringgit could come under renewed pressure.
We believe several factors could set the tone for markets in the coming weeks. (1) U.S. jobs report (July data) this release will be closely watched. If the numbers are strong, it could reignite inflation worries and drive yields and the dollar higher. (2) U.S. CPI inflation data with the Fed offering little guidance, every inflation reading will take on extra significance. (3) U.S. Federal Reserve communications any comments from Chairman Kevin Warsh will be dissected for clues. (4) U.S.- Iran diplomacy if relations thaw, oil prices could cool off, which might help tame inflation and soften the dollar. (5) Yen intervention risk both Washington and Tokyo are ready to step in again. Another round of intervention could lead to a weaker dollar all around.
