Weekly Fixed Income Summary : August 20 – August 24, 2018

Fed Hikes Loom

Outlook. We expect the yield curve to be rangebound with an upward bias ahead of the expected Fed hike during its next meeting this September 25-26. Odds raised to 96% from 88% following the release of minutes from the last Fed meeting. The minutes also noted that while the US labor market remains strong, potential trade disputes, notably with China and the European Union, could undermine economic growth. Meanwhile, Fed Chair Powell’s speech in Jackson Hole, Wyoming mirrored the same tone: gradual hikes, with two more possibly coming in September and December. Odds for another hike in December rose to 61.4% from 55% prior to the speech. This would bring the total hike to 100bps and the Fed fund rates to 2.25%-2.50%. Furthermore, the Fed’s intention to continue to oversee the reduction in it’s balance sheet was also re-confirmed. From the end of September 2017 through the end of last week, the Fed’s balance sheet fell by $221.5bn, on track to reach its target of $260.bn reduction by the end of August.

Market review. The local benchmark yield curve rose by 7bps on average week-on-week (WoW) as the market digested both Fed minutes and the Jackson Hole meeting. The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) stayed at 390bps as both fell by 5 bps to 6.73% (bid) and 2.82%, respectively. However, we do note that the last done rate for the local 10-yr benchmark was 6.38%. Yields of ROPs shed 5bps on average, tracking the movement of the UST curve which also decreased by 1bp.

Average total daily traded down 8% week-on-week (WoW) to Php8.2bn. The liquid yield curve fell by an average of 2bps WoW amid the shortened trading week as the front-end (364-day T-bill) was flat at 4.83%, the belly (FXTN 10-61: 9.7yrs) up by 12bps to 6.62%, while the tail (R25-01: 20.5yr) likewise up by 18bps to 7.23%, as strong indications of more Fed hikes and peaking inflation expectations could mean that the BSP might not be done for the year. Secondary trading average volume rose by 20% to Php9.1bn as T-bond volume recovered, rising by 90% to Php6.4bn. On the other hand, average T-bill trading shed 36% to Php2.7bn. The Bureau of the Treasury’s (BTr) latest Php15bn auction of 91-day, 182-day and 364-day T-bill was fully awarded at average bid rates of 3.218%, 4.070%, and 4.879%, respectively, -3bps, -5bps, and-2bps lower than the previous auction. The auction was 3.5x oversubscribed, anew high this year.

Emerging Markets’ (EM) 10-year down 6bps (WoW). Yields of EM bonds we follow were up down by 6bps WoW following the People’s Bank of China’s (PBOC) decision to resume its use of the counter-cyclical factor in an effort to resist further weakness with its currency. South Africa (10-year yield -14bps), Hungary (-13bps), and Turkey (-11bps) outperformed last week, while (10-year yield +40bps), Argentina (+6bps), and Thailand (+3bps) underperformed.

USTs down 1bp WoW. US Treasuries were down by 1bps WoW on average, while the 10-yr UST shed 5bps WoW to 2.82%, despite Powell’s speech in Jackson Hole as Trump’s hawkish talk about wanting the Fed to keep interest rates low may have boosted demand for Treasuries. Trade talks between the U.S. and China took place in Washington, D.C. last week and resolved close to nothing. In fact, both countries began imposing previously announced tariffs on $16bn of imports from the other side, and trade officials from both countries ended two days of talks with no agreement. Under the latest round of trade war, the U.S. began to levy an additional 25% in tariffs on Chinese imports ranging from motorcycles to machinery, while China hit back with a similarly sized tax on U.S.-produced items from coal to trucks. Relations between the two countries continue to draw into a stalemate as Trump, in an interview last week, accused China of manipulating its currency.