Get used to higher rates as government spending and AI borrowing show no signs of easing: Economist

• The market is in 'higher for longer' mode, expecting the Fed to hike rates by 25 bps in September and December.
• US Treasury yields are rising due to inflation fighting credibility and large US fiscal deficits, exacerbated by AI borrowing demand.
• Japanese JGB yields are at multi-decade highs, pushing the BOJ towards a 25 bps hike this week to manage yields.
• The Japanese Yen is fundamentally undervalued, and Japanese assets are becoming attractive, potentially leading to capital repatriation.

HSBC's Chief Asia Economist Fred Neumann discusses the 'higher for longer' interest rate environment, driven by market expectations for a hawkish Fed and significant fiscal deficits in the US and Japan. He highlights the potential for the Bank of Japan to hike rates and notes that the Japanese Yen is fundamentally undervalued, making Japanese assets attractive for capital return.