(May 22): The yield gap between short- and long-dated bonds in several Southeast Asian countries may widen further, as elevated oil prices increase inflationary pressures and deepen fiscal strains.
The gap between two- and 10-year government bond yields swelled to its widest in over three years in both Thailand and the Philippines this month. A key part of the Malaysian yield curve has also steepened since the Iran war began.
The trend results from the mounting fiscal burden on governments in a region heavily exposed to energy imports, with authorities handing out fuel subsidies to cushion the blow of surging prices. Concerns about extra funding needs, as well as the recent global bond sell-off due to a worsening inflation picture, has dampened investor appetite for long-dated sovereign debt in those markets.
“Markets with weaker fiscal buffers or greater energy import dependence are likely more exposed to steepening risk, which means Asean markets seem most vulnerable should oil prices stay higher for longer,” said George Efstathopoulos, a portfolio manager at Fidelity International. “With oil prices likely to remain elevated, governments are already resorting to subsidies and transfers, adding to fiscal pressures.”
The yield spread between two- and 10-year Thai government bonds is now about 110 basis points, its widest since November 2022, Bloomberg-compiled data showed. The same part of the bond curve in the Philippines expanded to as much as 120 basis points earlier this month, marking the biggest gap since January 2023, before paring the gains.
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Citigroup Inc strategists said in a note last week that there is room for further curve steepening in both countries, partially due to weaker demand at auctions for long-dated notes.
An auction to sell a Thai sovereign bond due in 2050 on May 13 received a bid-to-cover ratio of 1.17 times, the lowest for this tenor this year. A few days later, the Philippine government rejected all bids for a seven-year note it auctioned to prevent a sharp rise in yields.
Thailand is pushing ahead with a controversial 400 billion baht (US$12.0 billion or $15.7 billion) emergency borrowing plan to fund cash handouts, fuel relief and subsidies. The nation’s public debt is approaching the government’s self-imposed ceiling of 70% of gross domestic product.
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In the Philippines, investor concerns have also been on the rise after both Fitch Ratings and S&P Global Ratings cut the country’s credit rating outlook, citing risks arising from higher energy prices.
Elsewhere in the region, Malaysia’s five-to-10-year yield spread has also widened since the start of the Middle East conflict. Despite being a net energy exporter, the nation is also ramping up spending on fuel subsidies, although the government signalled last month that it remains on track to meet its fiscal deficit target this year.
Indonesia is an outlier, with its own yield curve flattening as the central bank has been selling short-term debt securities and buying long-dated bonds to help defend its slumping currency and stabilise debt financing costs. Further aiding the trend was Bank Indonesia’s larger-than-expected interest-rate hike on Wednesday, a move that typically pushes up policy-sensitive short-dated yields.
But for most of its Southeast Asian peers, curve steepening remains the name of the game.
While emerging markets broadly entered the Iran war with better fiscal positions, “authorities that initially relied on fiscal subsidies to cushion the impact of the shock are having to re-evaluate how long such measures can remain in place”, said Peter Botoucharov, an emerging market credit analyst at T Rowe Price.
Uploaded by Tham Yek Lee
