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Southeast Asian Bonds Face El Niño Inflation Pressure
El Niño is a weather pattern that can cause droughts in Southeast Asia.
Droughts can make food more expensive.
When prices rise, central banks may raise interest rates to control inflation.
Higher interest rates can make government bonds less attractive and push their yields higher.
Analysts say this could hurt Southeast Asian bonds.
The Philippines and Thailand may face greater risks because food prices have a large effect on their inflation measures.
Regional bonds are also being pressured by higher United States Treasury yields and rising oil prices.
Officials in the Philippines and Thailand have already said El Niño could affect inflation.
Investors may be underestimating how long these price increases could last.
A resurgent El Niño could deepen Southeast Asia’s bond selloff, analysts say.
Drought-related food inflation may push regional bond yields and interest rates higher.
The Philippines and Thailand are especially exposed because food has a large CPI weighting.
Philippine 10-year yields rose 71 basis points last quarter to 7.62%.
Higher United States Treasury yields and oil prices are already pressuring regional debt.
- Who
- Southeast Asian governments, bond investors, regional central banks, and analysts from William Blair Investment Management, Aberdeen Investments, and T. Rowe Price.
- What
- Analysts warned that a resurgent El Niño could increase food inflation, raise interest-rate expectations, and deepen pressure on Southeast Asian bonds.
- Where
- Southeast Asia, particularly the Philippines and Thailand, with possible implications for Indonesia.
- When
- The warning concerns the current El Niño; the previous peak ran from August 2023 to June 2024, while recent official comments came in late August and early September.
- Why
- El Niño-related droughts may raise food prices and potentially electricity costs, adding to pressure from higher United States Treasury yields and oil prices.
Key facts
- El Niño probability
- The United States Climate Prediction Center projects a 75% chance that the current El Niño becomes a historic event surpassing records dating back to 1950.
- Philippine 10-year yield
- The yield rose 71 basis points in the previous quarter to 7.62%, near its highest level since 2018.
- Most exposed markets
- The Philippines and Thailand have emerging Asia’s highest food consumer price index weightings.
- Previous El Niño peak
- From August 2023 to June 2024, an Asian rice price index remained between the 88th and 100th percentiles of five-year monthly prices.
- Policy response
- Bangko Sentral ng Pilipinas said it was ready to raise rates over price risks including El Niño.
- Thai inflation outlook
- A Thai official said El Niño would be among the key drivers of inflation later in the year.
- Additional market pressures
- Higher United States Treasury yields and rising oil prices are already weighing on Southeast Asian debt.
Quotes
Alexandra Symeonidi
Senior corporate credit and sustainability analyst at William Blair Investment Management
“There’s a reasonable case that the market is underpricing the risk from El Niño. This argues for a higher risk premium than is currently reflected and could pose a risk to bonds in Southeast Asia.”
livemint.com
Michael Langham
Emerging-markets economist at Aberdeen Investments
“El Niño risks have been increasingly cropping up in our global macro discussions since mid-year”
livemint.com
Tongai Kunorubwe
Director of research for responsible investing at T. Rowe Price
“the question is whether food or electricity inflation becomes persistent enough to change the path of interest rates”
livemint.com
Sources
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