Historical patterns suggest that prolonged high oil prices may accelerate the rise in bond yields across Asian emerging markets. Market observers indicate that this risk is not yet fully priced in by the market.

An analysis of four scenarios since 2017 shows that the impact of oil price shocks on regional bonds could intensify over time. Research indicates that, as the Iran conflict enters its third month, every 10% increase in Brent crude prices could push the average yield on 10-year government bonds in the region up by 16 basis points.

During the initial two months following the outbreak of the conflict, a 10% rise in oil prices led to an average increase of 14 basis points in these yields. As the U.S.-Iran peace agreement remains deadlocked and the Strait of Hormuz faces prolonged closure, escalating fiscal pressures from soaring crude prices are prompting traders to reposition their portfolios.

Anthony Kettle, a senior portfolio manager at RBC Bluebay Asset Management, noted that markets do not appear to fully account for the risk of deteriorating fundamentals resulting from a protracted Middle East conflict.

Beyond the energy sector, he also warned that disruptions in the supply of petrochemicals and fertilizers could hamper economic growth and potentially trigger stagflation.

Analysis of past energy shocks reveals that the reaction of emerging market bonds intensifies over a 12-week period. In emerging Asia, a 10% oil price increase in the first month led to an average rise of only about 2 basis points in 10-year yields. By the eighth week, the increase widened to 13 basis points, and by the 12th week, the average rise approached 16 basis points.

Pressure is already emerging in local bond markets as rising crude costs drive up overall inflation. Additionally, higher oil prices increase the risk of elevated debt issuance, as governments boost fuel subsidies to mitigate public discontent.

Since the onset of the Iran conflict, Philippine bond yields have risen the most among Asian markets. The country’s central bank raised interest rates by 25 basis points last week to counter inflation pressures stemming from higher oil prices and signaled the possibility of further hikes.

Investors will closely monitor April inflation data from Indonesia, South Korea, Thailand, and the Philippines next week to assess interest rate trends and their implications for bond markets.

The full inflationary impact typically transmits to the real economy gradually over two to three months after a shock begins, according to Lin Qichao, chief economist at Cathay United Bank. If the reopening of the Strait of Hormuz is delayed further beyond the end of May, pressure for policy rate hikes could increase in Thailand, Indonesia, Malaysia, and the Philippines.