Inflation Fears Hit Emerging Asia Bonds as Rate-Hike Bets Build

(Bloomberg) -- Fears of runaway inflation are sweeping across emerging Asia, with bond traders betting that central banks will have to act to stamp out growing price pressures.

Thai rate swaps and bond yields jumped Thursday after a report showed that the nation's core inflation rate held at a 10-year high in April. Faster-than-expected consumer-price gains fueled a surge in short-end Philippine yields while benchmark Indian rates extended a rise triggered by a surprise rate hike on Wednesday.

The moves are telegraphing concerns that Asian central banks may have fallen behind the curve in addressing soaring price pressures as the war in Ukraine and China's Covid curbs drive global prices higher. Thailand's monetary authority has said it can look past short-term price pressures while its Philippine counterpart has been on hold for the past year.

“Market participants are signaling that they don't believe that the Bank of Thailand will maintain the policy rate at 0.5% this year, with the two-year Thai yield signaling that the first quarter-percentage-point hike should arrive in the second half,” said Poon Panichpibool, a strategist at Krung Thai Bank Pcl in Bangkok.

Traders are betting that the Bank of Thailand will have to raise rates in the coming months as a recent increase in fuel prices translates into quicker inflation. The premium on two-year non-deliverable interest rate swaps over the policy rate has widened to 138 basis points, the highest in more than a decade.

Over in the Philippines, two-year sovereign bond yields jumped 13 basis points after a report showed consumer prices climbed at the fastest pace in over three years in April. Supply disruptions may fuel inflationary pressures, and warrant “closer monitoring to enable timely intervention in order to arrest potential second-round effects,” central bank Governor Benjamin Diokno said after the data was released.

Inflation Gains Keeping Southeast Asia Central Bankers on Edge

Traders are also not ruling out a further increase in India's borrowing costs after the central bank's out-of-the-cycle rate hike on Wednesday. Yields on 10-year government bonds climbed as much as seven basis points on Thursday after ending 26 basis points higher the previous day.

Persistent price pressures are becoming more acute, particularly on food, Governor Shaktikanta Das said Wednesday, adding that there's a risk prices stay at this level for “too long” and expectations become unanchored.