(Bloomberg) -- India's sovereign bonds look among the most vulnerable to an oil-price shock among emerging debt markets across Asia.
Yields jumped an average of 10 basis points during the most significant crude spikes in recent history, with India's five-year bond showing the most consistent reaction, according to a Bloomberg analysis of seven such events dating back to 2015. This was followed by Philippine debt, while Chinese securities displayed the most resilience to higher energy prices.
A selloff in India's bond markets, including its corporate debt, is gathering pace as oil prices extended their rally above $110 a barrel after Russia invaded Ukraine. Traders are pricing in a more hawkish trajectory for the Reserve Bank of India, with overnight index swaps showing expectations for two rate hikes over the next six months as inflation accelerates.
“India's currency and rates market implied projections suggest heightened concerns over the likely path of inflation, with much hinging on oil prices as well as the clearing of supply chain bottlenecks and the monsoon,” said Philip McNicholas, a foreign-exchange and rates strategist at Bloomberg Intelligence in Singapore.
The latest jump in oil prices comes at a bad time for import-reliant India, with domestic price pressures above the still-dovish central bank's target. The nation's government debt has lost 1.9% since the start of last week. Rupee-denominated corporate bonds are also suffering, especially longer-maturity debt which is more sensitive to inflation.
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Study Details
The analysis showed Indian bonds displayed the most consistent reaction to a surge in oil prices, as measured by the mean move divided over the standard deviation of responses. That resulted in the highest ratio in emerging Asia.
Yields on India's five-year bonds, which are more liquid and reflect inflation expectations, rose by a median of more than 10 basis points as oil prices jumped during the seven events. Philippine five-year yields rose almost 16 basis points. The two countries are among those in Asia most at risk as a sustained increase in oil prices fans inflation, slows growth and weakens their currencies, Nomura Holdings Inc. said last week.
China bonds were the least exposed to higher energy costs for reasons that include a robust current-account surplus and relatively low foreign ownership -- buoying their reputation as a haven.
| SOVEREIGN DEBT | CONSISTENCY | SIZE | DIRECTIONALITY |
|---|---|---|---|
Ratio of mean over standard deviation of moves | Average yield move (bps) | Number of times yields and oil both rose | |
| India | 1.19 | 10.4 | 7 |
| Philippines | 0.83 | 15.6 | 6 |
| South Korea | 0.69 | 9.5 | 6 |
| Malaysia | 0.68 | 0.3 | 4 |
| Thailand | 0.59 | 8.1 | 4 |
| Indonesia | 0.30 | 2.9 | 5 |
| China | 0.01 | 0.5 | 4 |
- NOTE: Data are based on seven scenarios: a strike at U.S. refineries in 2015, hurricane impact on oil supplies in 2017, OPEC oil curtailment in 2017, the U.S.-Russia proxy-conflict in Syria in 2018, attack on Saudi oil facilities in 2019, OPEC curtailment in 2021 and Russia's assault on Ukraine. Data for the latter are as of March 2.
©2022 Bloomberg L.P.
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