Plunging oil prices have sparked a big rally in Asian government bond markets as lower fuel costs cut inflation expectations, but the rally could be built on shallow foundations as monetary policymakers remain out of step with tumbling bond yields.

The price of oil CLc1, of which Asia is a net importer, has halved in less than six months, driving bond yields down across the region, from India to South Korea, as markets anticipate looser monetary policy to accommodate the resulting disinflation.

The imminence of further monetary easing in Europe and Japan builds a strong case for bond yields to drop further.

But there is little sign yet of official rate cuts, particularly in markets such as Indonesia, Malaysia and the Philippines, where central banks were sounding hawkish or even raising rates into the final months of 2014.

"The oil price has caught central banks by surprise," said ING's chief Asian economist Tim Condon.

"The panic of 2013 is right now foremost in their minds, and they are looking at a Fed rate hike, and so I think they will remain pretty dug in," he said.

The fear of a repeat of 2013's "taper tantrum", when talk of the Federal Reserve withdrawing monetary stimulus prompted vast sums of foreign capital to bail out of the region, helps explain why Asian central banks might err on the side of tighter monetary policy.

But there are other factors that also suggest official policy will stay tighter than the bond markets imply.

For one, a rising U.S. dollar is pushing down all emerging market currencies, which already indirectly eases monetary conditions for Asian policymakers and creates pressure on them to keep interest rates up to prevent the flight of foreign cash.

The market mismatch is evident in Indonesia, where the rupiah currency IDR= has fallen 9 percent against the dollar in the past six months.

Ten-year Indonesian government bond yields, which are normally significantly higher than overnight policy rates to reflect the risk of holding bonds to term, are just 5 basis points above the 7.75 percent policy rate, having fallen 60 bps since mid-December.

One plausible scenario that could trigger a bond market tumble is if lower oil costs dramatically improve U.S. growth numbers in the next couple of months, leading to renewed optimism about global growth and a rise in Treasury yields.

Far from cutting rates, policymakers might then have to raise rates.

PARADOX

The odds of this high-growth scenario playing out are perhaps reflected in how well equity markets have held up despite worries about disinflation, patchy economic growth and the possibility that Greece could return to the emergency room.

Despite a wobbly start to 2015, Asian shares .MIAPJ0000PUS are up 6 percent in the past three months.

"We are apparently on the edge of deflation, and yet equity markets aren't collapsing," said BofA Merrill Lynch strategist Claudio Piron. "And there are certain elements to what is going on which are reminiscent of the Asian financial crisis -- oil prices falling, dollar strengthening, bonds rallying strongly -- which all seems very ominous."

With the exception of Thailand, none of Asia's central banks has explicitly spoken of the need for easier policy.

Inflation has slowed sharply, except in Indonesia and Malaysia, where fuel subsidies were cut late last year.

While consumer price inflation in the Philippines is well below the central bank's expected 3 percent average for the year, the rhetoric from policymakers suggests markets may at best hope for rates to be on hold.

On the other hand, Indonesia's inflation is running at nearly double the official forecast range for this year, thanks to a jump in domestic oil prices.

ING's Condon doesn't expect any of Asia's central banks to react in a hurry to either oil or slowing inflation, and instead says they might be prepared to tolerate disinflation just as the European Central Bank and Fed do.

"There is some sort of asymmetry there. It's okay to undershoot inflation, it's prohibitive to overshoot. That, I think, will be the story in Asia as well."

Some market participants recognize that bias, which is possibly why short-end yields in Asian bond markets haven't moved much. But it is in longer-term yields that investors might read a warning that 2015 will hold more pain than gain.