High Oil Prices Threaten Asian Yields to Rise
Survived high oil prices risk driving faster increases in government bond yields in emerging Asia, while the market is not yet fully priced in the impact. Bloomberg analysis of several episodes since 2017 shows that the sensitivity of regional yields to oil shocks tends to increase over time, particularly as conflicts enter a protracted phase.
In a scenario where the Iran conflict enters its third month, the average 10-year yield in emerging Asia is expected to rise by around 16 bps for every 10% increase in Brent. This pace is faster than the average of 14 bps per 10% recorded in the first two months of the conflict, reflecting the increasingly pronounced transmission of inflation and fiscal risks as high energy prices persist.
Uncertainty over a US-Iran peace deal and the prolonged blockade in the Strait of Hormuz have investors preparing to adjust their portfolios as the fiscal burden of the oil surge grows. Anthony Kettle of RBC Bluebay believes the market has not fully priced in the potential for a decline in fundamentals due to the protracted conflict, including the risk of disruptions to petrochemical and fertilizer supplies that could depress growth and trigger stagflation.
Pressure is starting to show in the local bond market as higher oil costs push up headline inflation, while also raising the risk of larger debt issuance if the government expands fuel subsidies to quell social unrest. Bloomberg notes that emerging-market bonds tend to react strongly over a 12-week horizon: in emerging Asia, the average yield increase per 10% oil price increase was only 2 bps in the first month, rising to around 13 bps in the eighth week, and approaching 16 bps in the 12th week.
In Asia, Philippine yields are said to have risen the most since the conflict broke out, as central banks signaled the possibility of further interest rate hikes after raising rates 25 bps last week to curb oil-fueled inflation. Investors are now awaiting the release of April inflation figures from Indonesia, South Korea, Thailand, Taiwan, and the Philippines next week to gauge the direction of interest rates and their implications for the bond market. Cathay United Bank believes the inflationary impact is typically fully felt within 2–3 months, and that upward pressure on interest rates could increase if the opening of Hormuz is further delayed until the end of May.
5 key points:
- High oil prices risk pushing Asian emerging bond yields up faster and are not yet fully priced into the market.
- Bloomberg analysis: The average 10-year yield could rise 16 bps for every 10% increase in Brent as the conflict enters its third month.
- Yield reactions strengthen over time: 2 bps (month 1), 13 bps (week 8), and -16 bps (week 12) per 10% increase in oil.
- High oil prices raise inflation and fiscal risks, including the potential for increased debt issuance due to energy subsidies.
- Philippine yields rise the most; the market awaits Asian inflation data next week to gauge the likelihood of further interest rate hikes. (Asd)*
Source: Newsmaker.id
