Weekly Fixed Income Summary : July 22 – July 26, 2019

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Rate Cuts Priced In

Outlook. Expect local bond yields to remain rangebound as the local and international market have largely priced in the Fed cut this week. We don’t think US President Trump’s comments (“will only do little”) on the possible 25bps cut will change the Fed’s course. But the Fed’s move will reinforce China and E.U’s further lowering interest rates and pumping money to help their slowing economy.

BSP Gov. Diokno is set to make its rate decision on August 8 based on the second quarter Gross Domestic Product (GDP) data which is seen to rebound and July inflation, to be released on August 6, which is predicted to slow further to 2.5% (UA&P and FMIC estimates), from 2.7% in June. The better inflation outlook of 2.7% this year and 3.0% in 2020 has given BSP more room to cut rates. The BSP will also test the market with its 1-year bond issuance by late August or September. This bond issuance will determine the effectivity of the liquidity management and will reduce the money supply according to BSP. It includes the certificate of indebtedness and term deposit facility offered at 7, 14 and 28-day terms. The National Government Debt for 2Q19 was 0.6% lower from last month recorded at Php7.87 trillion due to foreign exchange fluctuations and domestic and foreign repayments for some of the obligations.

Market review. The local benchmark yield curve fell by 20bps on average week-on-week (WoW) due to the anticipation of the BSP and FED rate cuts. Year-to-date, the local yield curve was down by an average of 234bps while the 10-yr was down by 231bps.

The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) narrowed to 268bps from 291bps in the week prior as the former drop ped 20bps WoW to 4.76% while the latter also shed 3bps to 2.08%. Yields of ROPs were down by 3bps on average while US Treasuries were down by 5bps on average.

Average total daily volume flattish, up by 4.8% week-on-week (WoW) to Php40bn. The liquid yield curve fell by an average of 20bps WoW as the front-end (364-day T-bill) was down by 25bps to 4.53%, the belly (FXTN 10-63: 9.5yrs) down by 20bps to 4.76%, while the tail (R25-01: 20.5yr) shed 9bps to 4.98%. Secondary trading average volume was up by 4.8% to Php39.8bn as T-bond volume rose 5% to Php35.4bn, while T-bill volume rose 4% to Php4.3bn. The Bureau of the Treasury’s (BTr) fully awarded its latest Php20bn auction of reissured 20-yr T-bonds at an average yield of 5.015%, 15bps lower than the prevailing secondary market rate. The auction was 1.5x oversubscribed. Lastly, the latest Php15bn auction of 91-day, 182-day, and 364-day T-bills was fully awarded at average rages of 3.769%, 4.100%, and 4.519%, respectively, 11bps, 14bps, and 22bps lower than the previous auction. The auction was 5.0x oversubscribed.

Emerging Markets’ (EM) 10-year down 6bps (WoW). Yields of EM bonds we follow were down 6bps because of FED cut anticipation. All emerging markets outperformed last week led by Turkey (10-yr yield -23bps), followed by Mexico (-9bps), Brazil (-8bps), Colombia (-6bps), Indonesia (-4bps), Peru (-3bps), and Philippines and Chile (-1bps).

USTs up 5bps WoW. US Treasuries were up by 5bps WoW on average as the 10-yr UST likewise rose by 3bps to 2.08% as Markit US Service PMI and New Home Sales rose to 52.2 and 7%, respectively. Initial Jobless Claims dropped to 206k in July from 216k of the previous month.

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