Higher Oil Prices May Accelerate Yield Gains in Emerging Asia

Oil Price Surge Threatens Faster Rise in Emerging Asian Bond Yields

A prolonged oil price surge, driven by the Iran conflict, may lead to a faster rise in emerging Asian bond yields, according to a Bloomberg analysis of past energy shocks. The study shows that average 10-year yields in the region may climb 16 basis points for every 10% increase in Brent oil prices, a pace that exceeds the average 14 basis points increase recorded for every 10% rise in oil prices in the first two months of the conflict.

The vulnerability of regional bonds to oil price shocks could intensify over time, with the analysis highlighting four past scenarios since 2017. Emerging-market bond reactions in the region tend to intensify over a 12-week horizon, with 10-year yields rising 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.

Traders are preparing to recalibrate their portfolios as the fiscal fallout from the surge in crude prices deepens. Anthony Kettle, senior portfolio manager at RBC Bluebay Asset Management, warned that disruptions to petrochemical and fertilizer supplies could hit growth and trigger stagflation. The market does not seem to be fully pricing the potential deterioration in fundamentals that a protracted conflict in the Middle East could bring.

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Beyond energy, the analysis shows that rising crude costs drive up headline inflation, increasing 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.

The 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.

Chi-Chao Lin, chief economist at Cathay United Bank in Taipei, warned that the fuller impact of inflation can be felt on real economies two to three months after the initial shock. "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."

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