A resurgent El Nino pattern risks deepening a selloff in South-east Asian bonds, strategists say, threatening to push yields higher just as rising US Treasury rates and oil prices squeeze regional debt.
Benchmark bond yields across South-east Asia are vulnerable to further increases as droughts caused by the El Nino weather phenomenon drive food inflation.
The risk is concentrated in economies like the Philippines and Thailand, which carry emerging Asia’s highest food consumer price index weightings and saw elevated yields coincide with rising food costs when El Nino last peaked in 2023 to 2024, according to a Bloomberg analysis.
There is a reasonable case that the market is underpricing the risk from El Nino, according to Alexandra Symeonidi, senior corporate credit and sustainability analyst at William Blair Investment Management.
This argues for a higher risk premium than is currently reflected and “could pose a risk to bonds in South-east Asia,” she said.
The warning comes as the US Climate Prediction Center projects a 75% chance that the current El Nino could become a historic event, surpassing records dating back to 1950.
South-east Asian bonds are already under pressure from two global forces: higher US Treasury yields, which draw money toward the US, and rising oil prices, which push up local costs.
El Nino acts as a third blow, threatening to force interest rates even higher.
Philippine 10-year yields jumped 71 basis points in the previous quarter to 7.62%, near the highest since 2018, while Thai 10-year yields are inching up toward the highest since early 2025.
A look at the last El Nino peak highlights the potential upside for yields.
From August 2023 to June 2024, an Asian rice price index hovered between the 88th and 100th percentile of five-year monthly prices.
This period coincided with elevated shorter-dated yields in the region’s most food-sensitive markets.
Thai two-year yields held between the 85th and 100th percentiles and Philippine two-year yields traded between the 75th and 97th percentiles.
“El Nino risks have been increasingly cropping up in our global macro discussions since mid-year,” said Michael Langham, emerging-markets economist at Aberdeen Investments.
Markets are potentially underpricing further rate hikes in Indonesia and the Philippines as inflationary pressures return, posing a risk for local-currency bonds, he said.
Policymakers are already taking notice. Bangko Sentral ng Pilipinas signaled in late August that it stands ready to hike rates on price risks including from El Nino.
A Thai official noted in early September that El Nino will be among the key drivers for inflation later this year.
For South-east Asian local-currency government bonds, “the question is whether food or electricity inflation becomes persistent enough to change the path of interest rates,” said Tongai Kunorubwe, director of research for responsible investing at T. Rowe Price.
“Expectations for interest rates could prove too low if a food or electricity price shock lasts longer or spreads more widely than investors anticipate,” he said. BLOOMBERG
