Weekly Fixed Income Summary: July 1, 2016

Brexit Boosts EM’s After Initial Shock

Bonds Outlook. We expect bond yields to remain depressed as bonds rally this week following post-Brexit investors’ diaspora. As it turns out, the Philippines proved to be resilient from the shockwaves caused by U.K.’s vote to exit the European Union as the Philippines’ exposure to the U.K. or the E.U. was limited, making it quite attractive to investors seeking safe haven. This was reflected in last Tuesday’s (June 28) Php25bn auction of 4-yr bonds with 3.375% interest by the Bureau of Treasury, which was more than three times oversubscribed at Php89bn. This is a sign of investors’ confidence in the country’s long-term prospects.

The past week also saw the inauguration of Pres. Rodrigo Duterte, further bolstering investor confidence with his promise of increased government spending, relaxation of foreign ownership of corporations, and progressive tax reform among others.

The BSP reported a 13.5% year-on-year (YoY) growth in domestic liquidity (M3) for May from April’s 12.7%, driven by sustained demand for credit. Outstanding loans of commercial banks, net of reverse repurchase (RRP), also grew 17.7% YoY in May. The BSP is set to release the inflation rate/CPI tomorrow, July 5, which is expected to be higher but would be a non-factor for interest rates. Lastly, government would be borrowing Php135bn from the domestic market for the third quarter, the same amount as the last quarter. Hence, the fact that borrowing is still the same despite expected higher inflation and strong liquidity will help sustain the rally in bonds.

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