The quick recovery in emerging-market bonds this month suggests investors aren’t concerned about a further escalation in Middle East tensions. But those worried about a renewal of hostilities should seek out Russian and Thai exposure and avoid securities from Turkey and South Africa, according to a Bloomberg analysis.

A study of the relationship between outsized surges in crude prices and moves in 11 emerging market five-year bond spreads over Treasuries showed countries that are net oil importers and those suffering from twin deficits were more vulnerable. By contrast, economies with a robust current-account surplus and are net oil exporters were less affected by a spike in crude.

Turkish and South African spreads followed oil prices higher most consistently, while those in Russia and Thailand moved in the opposite direction most of the time. The analysis covers eight periods from 2012 to 2019 when one-month Brent futures jumped by an average of about 20% in as few as three and as many as 69 days.

The US killing of Iranian General Qassem Soleimani and retaliatory airstrikes by Iran on a joint US-Iraqi base sent Brent futures up as much as 8% in four days in early January. Risk assets quickly sold off, with emerging-market bond yields widening in Turkey and South Africa, while tightening in Thailand and South Korea.

Below is a table showing the size and consistency of each country’s median bond spread reaction to greater spikes in oil. 



(% of time of move

was in line with oil)


(median bond spread

move in basis points)

Turkey 100% 26
South Africa 63% 10
Indonesia 63% 3
Mexico 50% -2
South Korea 50% -3
China 50% -5
India 38% -7
Malaysia 38% -8
Brazil 38% -11
Russia 38% -22
Thailand 25% -12
Note: The median move higher in US Treasury yields was 16 basis points.

Key insights

  • Moves in Turkish spreads are the most consistent, rising in the same direction as oil prices in all eight scenarios. The median move was 26 basis points for an average 20% rise in crude
    • The direct impact of instability in the Middle East is clearly a factor — in the March 8, 2018 – May 16, 2018 period, the US and Russia were in a proxy conflict in Turkey’s neighbour Syria
    • Meanwhile, Turkey’s current account is forecast by the government to return to a deficit this year, making the nation more vulnerable to higher oil prices
    • Upward pressure on Turkish yields should remain after the monthly fiscal deficit hit a record high in December on the back of a spending splurge during back-to-back elections last year
  • South Africa’s spread moved in tandem with oil prices in five out of eight scenarios (63%), with a median increase of 10 basis points. The country, which has faced twin deficits since at least 2012, imports most of its oil and benchmarks gasoline prices against Brent crude
  • Russia’s spread only rose in three scenarios, with the median move a decline of 22 basis points, underscoring how the world’s top energy exporter benefits from rising crude prices
    • The secondary impact on yields from oil-driven inflation is becoming increasingly muted amid sub-4% inflation since October
  • Thailand’s spread only rose in two scenarios, with the median move a decline of 12 basis points. The baht’s haven status may be a factor, emanating from a rising current-account surplus and foreign reserves at a record high.

Marcus Wong is an EM macro strategist, who writes for Bloomberg. The observations he makes are his own and not intended as investment advice.

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