(March 11): Bonds in the Philippines are likely to face the biggest challenge in Asia should the ongoing conflict in the Middle East lead to a sustained increase in oil prices.
Peso-denominated debt has shown the highest sensitivity and the most consistent reaction to crude spikes in recent years, according to a Bloomberg analysis of five events since 2022. The study examined the degree to which bond yields moved outside a normal trading range in these episodes, which include the ongoing Iran conflict and the war in Ukraine.
Yields on five-year peso bonds have jumped by an average 25 basis points during the events, the analysis showed. Similar maturity yields on Chinese notes have fallen two basis points on average, making them the most resilient in the region.
Rising oil prices pose a threat to many of Asia’s emerging markets. But the Philippines' consumption-driven economy is particularly vulnerable given a heavy reliance on imports, quicker transmission of fuel costs into transport and food prices, and a currency that’s trading near record lows. To make matters worse, inflation already accelerated to 2.4% in February, the fastest pace in over a year.
Though US President Donald Trump’s signal that the Iran conflict was possibly nearing an end has helped halt oil’s rapid advance, the outlook remains far from certain. Prices are still up more than 20% this month.
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The rally has swiftly turned the tide against the Philippines' financial markets. Just weeks ago, local-currency bonds were winning favour with investors, thanks to flush domestic liquidity, attractive valuations and a benign interest-rate outlook. They are now being sold as concerns over inflation mount in the Southeast Asian nation, which imports nearly all of its oil requirements.
The yield on five-year peso bonds has surged nearly 80 basis points so far in March. It slid about 24 basis points in the first two months of the year. The peso tumbled to a record low on Monday.
Oil reaching US$100 per barrel could force monetary policy tightening as inflation could breach the central bank’s target range, Bangko Sentral ng Pilipinas Governor Eli Remolona Jr said on March 6, even before Monday’s sharp rally that sent prices toward US$120 per barrel.
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“Higher oil prices are a scourge for the Philippines,” said Rajeev de Mello, global macro portfolio manager at Gama Asset Management. “Higher inflation, a more hawkish BSP and a rise in global bond yields will put downward pressure on peso government bonds.”
As bonds slide, analysts are shifting their strategies. Citigroup Inc this month closed its long FX-hedged call on Philippine bonds initiated in early January, booking a profit. It cited the negative impact of higher oil prices on the debt and the currency.
China’s resilience
Meanwhile, bonds in China — the world’s largest oil importer — have fared relatively better during the oil spike episodes, even as they fell Monday amid a global selloff.
The nation’s authorities seek to limit the impact of surging costs through price controls, subsidies and state influence in key sectors, reducing pressure on yields. The market is also driven more by domestic growth dynamics and central bank policy, which have often leaned toward easing and maintaining currency stability when external shocks threaten activity.
While inflation accelerated to 1.3% in February, it is still below the government’s 2% target.
“We think Asian rates, where inflation momentum has ticked up and central banks have mostly finished easing, remain vulnerable as the market could start pricing rate hikes as a next step if supply-side concerns persist,” Goldman Sachs Group Inc strategists including Kamakshya Trivedi and Danny Suwanapruti wrote in a note dated March 4.
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