(Bloomberg) — Higher-for-longer oil prices threaten a faster rise in emerging Asian bond yields, if history is any guide — a risk market watchers say isn’t yet fully priced in.
The vulnerability of regional bonds to oil price shocks could intensify over time, a Bloomberg analysis of previous four scenarios since 2017 shows. Average 10-year yields in the region may climb 16 basis points for every 10% increase in Brent oil prices as the Iran conflict enters the third month, the study shows.
That pace exceeds the average 14 basis points increase recorded for every 10% rise in oil prices in the first two months of the conflict. With a peace deal between US and Iran in limbo and the Strait of Hormuz in an extended blockade, traders are preparing to recalibrate their portfolios as the fiscal fallout from the surge in crude prices deepens.
“The market does not seem to be fully pricing the potential deterioration in fundamentals that a protracted conflict in the Middle East could bring,” said Anthony Kettle, senior portfolio manager at RBC Bluebay Asset Management.
Beyond energy, he warned that disruptions to petrochemical and fertilizer supplies could hit growth and trigger stagflation.
The Bloomberg analysis of past energy shocks show emerging-market bond reactions intensifying over a 12-week horizon. In emerging Asia, 10‑year yields rose an average of just two basis points for every 10% increase in oil prices in the first month, before gaining 13 basis points by week eight and roughly 16 basis points by week 12.
This pressure is already surfacing in local bond markets as rising crude costs drive up headline inflation. Higher prices also increase the risk of higher debt issuance, as governments boost fuel subsidies to mitigate public discontent.
Yields in the Philippines have risen the most in Asia since the conflict broke out, with the nation’s central bank signaling more interest rate hikes following a 25-basis-points increase last week to tame oil-led inflation.
Bangko Sentral ng Pilipinas said on Thursday that it forecasts the April inflation rate to potentially surge to between 5.6% and 6.4%, breaching its target range. The Philippines, alongside Indonesia, South Korea, Thailand and Taiwan will publish April inflation reports next week.
“The fuller impact of inflation can be felt on real economies two to three months after the initial shock,” said Chi-Chao Lin, chief economist at Cathay United Bank in Taipei. “If the reopening of the Strait of Hormuz is delayed further toward the end of May, we could see rising pressure for policy rate hikes in Thailand, Indonesia, Malaysia and the Philippines.”
(Updates with latest BSP comments on inflation in 9th paragraph.)
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