The announcement of a ceasefire between the US and Iran has triggered a repricing across global rates, with UST 10Y yield declining on the back of easing inflation concerns and a compression in oil risk premia. Asia LCY government bonds are taking a breather, with notable divergence emerging across markets.
High-beta EMs have led the rally, with Indonesia, Korea and Thailand seeing the largest spread compression versus USTs alongside a rebound in FX. Spreads between 10Y Indo GB, KTB and Thai GB against UST have compressed by 21bps, 23bps and 19bps month-to-date, respectively. These markets had previously borne the brunt of the oil shock and global growth concerns. Korea is benefiting from improving global demand expectations for semiconductor exports, while the likelihood of further Bank of Korea tightening has diminished. Likewise, concerns over Thailand’s inbound tourism outlook are easing on lower energy prices.
Singapore’s SGSs continue to outperform on a total return basis despite the broader risk-on tone. Safe-haven demand remains intact as investors adopt a wait-and-see approach toward the ceasefire. However, gains are being capped by relatively rich valuations. Among ASEAN peers, Malaysia is underperforming despite MYR strength. As a net energy exporter, MGS had previously benefited from higher crude prices and is now lagging on the reversal.
Meanwhile, CGBs are seeing marginal spread widening amid declining UST yields. Chinese yields have remained stable, as domestic inflation is relatively insulated from energy price volatility. India has seen only modest compression. As India depends on the crude imports from Middle East and has relatively less sufficient oil reserves, any resurgence of higher oil prices could hit the IGBs again. From monetary policy perspective, the recent RBI pause and a rather neutral monetary policy stance are curbing the downside risks on IGB yields. INR exchange rates also rebound on RBI’s currency defense measures including offshore market restriction and position limits. 
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