- An imminent deal may help sentiment, but war costs will continue to build.
- Energy infrastructure damage to keep oil and gas costs elevated for longer.
- Strait of Hormuz risk raises shipping volatility and energy premiums.
- Higher defence spending adds to already stretched public finances.
- Rising yields and refinancing risks favour short-duration bond strategies.
Related Insights
Click here to read the full report.
COMMENTARY: Cost of the war
An Iran deal may be around the corner, but the cost of the war will likely continue to accumulate in the coming months. The most obvious cost is inflation, which won’t dissipate even with an expeditious re-opening of the Strait of Hormuz. Oil/gas production/refining facilities in the region have been affected substantially, which will continue to constraint the supply of petroleum products. Regardless of the contour of the deal, we think perceptions regarding the shipping of products through the Strait have shifted fundamentally, and a degree of volatility around safe passage would persist. Globally, nations would diversify energy suppliers and build larger strategic reserves, all adding to the cost of energy for years to come.
Then there is fiscal. The war has led to profound questions not just about energy security, but also about the reliability of ostensible allies to protect national security. Defence spending will likely rise as countries look to secure their backyards further.
The bond market is not taking these developments kindly. Public sector debt burdens have been on an uptrend through this decade, fuelled by global responses to the pandemic. Global government debt as a share of GDP has risen from a pre-pandemic level of 82% to 94% by end-25, with the IMF forecasting 100% by 2029. Public debt interest payment alone is heading toward 3% of global GDP presently.
These figures, already uncomfortable, are now looking particularly disconcerting as there is no visible sign of fiscal consolidation among the large indebted economies around the world, with the ongoing crisis making the task of taming debt even more onerous. Debt market selloff is unsurprising, with the mountain of long-duration papers up for refinancing for years to come.
Bond yields of major EM and DM economies have risen through this year, with two notable exceptions. Among high income economies, Singapore’s debt yield has in fact rallied; among EM economies, the same holds for China. But for the rest, there has been little respite from servicing an ever more expensive public debt burden. An announcement of an Iran deal may buoy markets, but only marginally, in our view. This war’s bills have to be paid for a while by most governments. With respect to investment strategy, that leaves us only with short-duration bond strategies.
Click here to read the full report.
Topic
GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates, Digital Assets or Commodities)[1]
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
[#for Distribution in Singapore] This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
[1] This disclaimer may not apply if the applicable assets fall within the definition of 'financial instruments' that are set out in Article 2(1) EU MAR (e.g. financial instruments that are traded on a regulated market, MTF or OTF, etc.). Section C of Annex I of MiFID2 specifies these 'financial instruments'.