ASEAN debt markets have moved to the front line of the latest energy shock. As geopolitical tensions push oil prices higher, the impact is feeding quickly into currencies, inflation expectations, and rate paths across the region. But country-level differentiation is emerging, so for investors, we believe the focus should be on ASEAN countries where energy sensitivity, policy credibility, and external resilience have the potential to drive positive outcomes.
Energy Price Effects Ripple Through EM Debt Markets
Emerging markets (EM) bonds have sold off in the broad based risk off environment, driven by escalating geopolitical tensions following the prolonged conflict with Iran.
The market response reflects concerns that a longer than expected conflict could sustain elevated energy prices, which would eventually drive higher food prices, renewed inflationary pressures, and slower global growth. This has revived fears of a stagflationary backdrop, weighing disproportionately on EM assets.
While markets appear broadly justified in pricing in weaker growth and tighter financial conditions, the outlook for energy prices is less straightforward. Futures markets suggest oil prices could normalize if hostilities ease, but damage to energy infrastructure may constrain supply for longer than expected. Even in a faster de-escalation scenario, inflation expectations may remain somewhat elevated, limiting the scope for a full reversal in yields.
More broadly, heightened uncertainty regarding the evolving conflict—amplified by real-time information flow—has contributed to sharper market swings. While the growth repricing appears directionally correct, the path and persistence of energy-driven inflation remain less certain, suggesting the risk of both an overshooting and a reversal of near-term market moves.
Even if tensions were to ease quickly and energy prices retrace, we would expect only a partial reversal in yields.
Market participants are also weighing the possibility of a near-term de-escalation in the conflict. Even if tensions were to ease quickly and energy prices retrace, we would expect only a partial reversal in yields. Near-term inflation expectations have already adjusted higher, and supply-side disruptions may take time to resolve, suggesting that yields are unlikely to return to pre-conflict levels in the near term.
EM debt markets have responded with wider spreads, higher yields, and underperformance in local currency markets as investors price in delayed monetary easing and weaker growth. Oil exporting EMs have held up relatively well, while energy importing EMs have seen sharper underperformance driven by FX.
Beyond oil prices, we are closely monitoring second round transmission channels—particularly disruptions to fertilizer supplies from the Middle East, which could negatively affect agricultural output and push food inflation higher.
More broadly, higher fuel costs tend to depress economic activity, weaken growth prospects, and strain fiscal positions through increased energy subsidies or import bills. These pressures ultimately translate into weaker currencies and higher local interest rates.
ASEAN Divergence: Importers Under Pressure, Exporters More Resilient
Looking at ASEAN economies, Thailand and the Philippines appear most exposed due to their sizable energy import bills and weaker terms of trade dynamics.
In the Philippines, vulnerability may be amplified by positioning. Strong local bond inflows tied to an accommodative monetary backdrop have supported the peso, but if external pressures persist, that positioning could unwind and contribute to sharper corrective moves.
In Thailand, persistently high energy import prices are likely to further strain an already weak economic backdrop—at the same time, the country grapples with slowing export demand from China, heightened global trade tensions, elevated household debt levels, and an overvalued currency.
Malaysia stands out to us as one of the more resilient economies in Southeast Asia.
Although no country is fully insulated from the energy price shock, Malaysia stands out to us as one of the more resilient economies in Southeast Asia. Its status as an energy exporter and oil producer—despite being a net importer of petroleum products for domestic use—may offer partial insulation from higher global energy prices. In addition, Malaysia stands to benefit from higher liquefied natural gas (LNG) export revenues following the post conflict repricing of energy commodities.
From an allocation perspective, we continue to tilt toward EMs with stronger external balances, credible policy frameworks, and relative insulation from energy driven inflation shocks.
Eyes on Macro Factors
Macro factors are worth watching. Markets entered the year expecting a broadly accommodative monetary environment across EMs, so any shift toward rate hikes would likely trigger an upward repricing in yields and potentially steeper yield curves.
In that environment, the long end of local currency government bond curves across ASEAN may be most vulnerable, as higher energy and food prices could lift long-term inflation expectations and drive bearish curve steepening. This dynamic reflects rising term premia and reduced confidence that inflation will return quickly to target, particularly in economies with weaker external balances or less policy flexibility. As a result, curve steepening may become a persistent feature rather than a temporary adjustment. Importantly, the degree of steepening is likely to vary across ASEAN, with more energy-exposed economies facing greater pressure at the long end of the curve.
Beyond monetary policy, investors are increasingly focused on second order inflation effects—particularly food prices—as a key macro risk.
Another emerging theme is the potential further redeployment of U.S. military resources from Asia to the Middle East, which could expose defense gaps in the region. This may necessitate higher fiscal spending across some ASEAN (as well as broader Asian) countries, adding another layer of pressure to sovereign balance sheets.
Clifford Lau, CFA, is a portfolio manager on William Blair's emerging markets debt team.
