Rising global bond yields revive carry-trade concerns for Vietnam’s stock market

One concern is the yen carry trade, in which investors borrow cheaply in Japanese yen and put the money into higher-yielding assets elsewhere.

As Japanese interest rates and bond yields rise, the return gap narrows, making the strategy less attractive and potentially prompting investors to sell riskier assets and buy back yen to unwind their positions.

Rising bond yields put pressure on emerging markets

Global bond markets have been experiencing notable volatility.

In early September, the yield on the 10-year U.S. Treasury briefly climbed to around 4.78-4.81 percent, its highest level in roughly 35 months.

The increase came amid mounting geopolitical tensions in the Middle East, oil prices remaining above US$90 per barrel, and growing concerns that inflationary pressures could persist.

In Japan, the yield on the 10-year Japanese government bond, or JGB, rose to around 3.015 percent, a level not seen in 30 years, since 1996.

Investors are also closely watching Japanese capital flows. In the first eight months of 2026, Japanese investors sold a net $18.7 billion worth of foreign bonds.

Meanwhile, Japan holds around $1.12 trillion in U.S. Treasury securities and remains one of the largest foreign holders of U.S. government debt.

According to Nguyen Ngoc Phuong, head of investment advisory at Business Center 03 of Yuanta Securities Vietnam, if Japanese investors continue repatriating capital as yields on Japanese government bonds become more attractive, U.S. Treasuries could face additional selling pressure.

This could push U.S. Treasury yields even higher, possibly above the 5-percent threshold.

If that scenario materializes, global financial markets could experience stronger volatility, triggering knock-on effects on capital markets and exchange rates while increasing public debt pressures in many countries.

Emerging markets, including Vietnam, are considered particularly sensitive to such developments.

Risks from carry trade?

According to the Yuanta Securities Vietnam expert, when the yield on the 10-year U.S. Treasury remains high, returns on assets considered relatively low-risk become more attractive.

Investors therefore tend to demand a higher risk premium for equities and other risk assets, putting pressure on valuations and capital flows in emerging markets.

Another potential risk comes from yen-funded carry trades.

For many years, investors have been able to borrow yen at low cost and invest the proceeds in higher-yielding assets such as stocks and bonds in emerging markets or cryptocurrencies.

As Japanese interest rates and bond yields rise, however, the yield gap narrows and the strategy becomes less attractive.

When investors unwind carry-trade positions, they may sell risk assets and buy back yen to repay their borrowings, potentially amplifying volatility across financial markets.

The U.S. dollar is another variable to watch.

The U.S. Dollar Index, or DXY, rose to around 99.24 points in early September, its highest level in two weeks, although it remained below the 101.8-point peak recorded in late June.

According to Phuong, if the dollar continues to strengthen, the USD/VND exchange rate could come under further pressure in the final months of the year.

3 scenarios for VN-Index through year-end

According to Phuong, the VN-Index reached an all-time high in May 2026, while Vietnam's GDP expanded 8.18 percent in the first half of the year.

Market valuations have also eased, with the VN-Index trading at a price-to-earnings ratio of around 11.9 times, about 22 percent below its 10-year average of 15.3 times.

However, performance has diverged sharply among groups of stocks, while foreign investors have continued to post substantial net selling.

This leaves the market caught between two sets of forces: domestic economic prospects, corporate earnings growth and the market-upgrade story on one side, and global interest rates, exchange-rate pressures and foreign capital flows on the other.

Based on these factors, Phuong outlined three scenarios for the VN-Index through the end of 2026.

Under the positive scenario, which he assigns a 35-percent probability, FTSE-related capital flows could arrive earlier and in greater volume, while the U.S. Federal Reserve refrains from raising interest rates and the Bank of Japan delays its next tightening move.

In this case, the VN-Index is expected to consolidate at elevated levels in the fourth quarter and could move toward 1,950-2,000 points by year-end.

The base-case scenario, assigned a 45-percent probability, assumes that the Fed remains cautious about inflation but does not raise rates, while the Bank of Japan could increase its policy rate by another 0.25 percentage point toward the end of the year.

Capital inflows related to Vietnam's market-upgrade process would arrive more slowly, while the USD/VND exchange rate would remain under control.

Under this scenario, the fourth quarter could see the VN-Index move sideways in a consolidation phase before recovering slightly toward year-end, with a projected range of 1,750-1,800 points.

The final scenario is the negative case, which Phuong assigns a 20-percent probability.

This could occur if the Fed raises interest rates by 0.25 percentage point, the yield on the 10-year U.S. Treasury rises above 5 percent, yen carry trades are unwound on a large scale, and tensions in the Middle East continue to escalate.

In that case, selling pressure across global financial markets could outweigh the positive impact of capital inflows associated with Vietnam's market upgrade.

The VN-Index could then undergo a sharp correction, with the year-end forecast lowered to around 1,500-1,550 points.