Bond markets in India and South Korea most vulnerable to massive sell-offs in emerging markets in the region

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The bond markets of South Korea and India are the most vulnerable to liquidation in the region’s emerging markets, although they tend to be at opposite ends of the investment spectrum.

Inflation in these two countries – one a technology exporter and the other a service and agriculture-based economy – is heavily influenced by rising energy prices given the amount they matter. Their bonds also have a higher sensitivity to U.S. inflation breakevens than others, according to data compiled by Bloomberg News.

Graphic

Growing price pressures have caused a rout in Australian and New Zealand debt markets this month, and traders are increasingly betting that entrenched inflation will cause central banks around the world to become more hawkish . The Bank of Korea has already risen 25 basis points, while India announced this month that it will end a government bond buying program.

The risks to bonds come from two fronts, “namely the risk of real domestic inflation seeping through import channels, and the way emerging Asian bond markets are dealing with rising yields in the Trésor “, according to Vishnu Varathan, head of economy and strategy at Mizuho Bank. Ltd in Singapore.

According to a Bloomberg analysis, Indian 10-year bond yields gained 0.78 basis points for every one basis point increase in the U.S. breakeven point at similar maturity, based on five episodes from 2019. A similar indicator for South Korea stood at 0.56. . While bonds in Thailand also have high sensitivity, inflation indicators have remained within the central bank’s target range.

India imports around 85% of its oil needs, while Korea buys almost all of its needs, making them more sensitive to energy prices. Moreover, the two vulnerable bond markets have little in common. 10-year bond yields in India are above 6% while those in South Korea are at 2.5%.

Rising inflation will spur new hawkish bets in India, with onshore overnight to five-year index swap rates poised for the biggest monthly gains since February. The end of bond purchases by the Reserve Bank of India is seen as a precursor to raising key rates.

South Korea’s October inflation figures, due next week, will be closely watched, after September’s estimates exceeded estimates, pushing bonds down. This will be the last reading before the Bank of Korea’s policy decision on November 25, as price growth has already exceeded the central bank’s 2% target for six consecutive months. Swaps are currently valuing over 100 basis points of increases over the next 12 months.

The following table shows the sensitivity of emerging market bond yields to US breakeven points.

Sensitivity in the United States

equilibrium rate

Moving the base point

for every 1 bp increase

within American breakeven points

Z-score
India 0.78 1.23
Thailand 0.76 0.76
South Korea 0.56 1.01
Malaysia 0.42 2.53
China 0.11 0.58
Indonesia -0.29 0.66

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