Weekly Fixed Income Summary : June 11 – 14, 2018

Upward pressure on yields

Outlook. Bond yields are expected to rise if the BSP raises its key policy rate in tomorrow’s meeting. But consensus expectation is that the Monetary Board (MB) will keep policy rates unchanged, digressing from the Fed’s hawkish tone set last week, citing easing inflation data in May. Despite recording a five-year high of 4.6%, inflation in May stabilized from April (0% inflation month-on-month) and clocked in below market expectation of 4.9%. The peso continued to trace 12-year low, closing at Php53.37/US$ last Friday amidst updated BoP deficit, bigger by 50% to $1.5bn for this year per forecast released by the BSP. It points to further weakness in the peso. The BSP hiked its BoP deficit forecast to US$1.5bn from the initial US$1bn and current account deficit forecast to US$3.1bn from the previous forecast of US$700mn deficit. The continued peso decline further inspired a sell-off in Philippine bonds, pushing yields higher. Risk-off sentiment brought by President Trump’s tariffs also provided upward pressure on local yields. US announced last Friday that it will impose 25% import tariffs on up to $50bn worth of Chinese goods starting July 6, and thereafter, and will further unveil restrictions on Chinese investments by the end of this month. China responded by vowing to levy import duties on US products of the “same scale and intensity” and threatened to void previous trade negotiations with the US.

Market review. The local benchmark yield curve was up 15bps week-on-week (WoW) on average and up 77bps year-to-date (YTD). The spread between the local 10-yr benchmark and 10-yr US Treasury (UST) widened to 327bps from last week’s 315bps as local 10-yr increased by 12bps while 10-yr UST stood pat at 2.922%. Yields of ROPs rose by another 2bps on average, bringing year-to-date increase to 74bps.

Average total daily traded volume up 64% week-on-week (WoW) to Php8.9bn. The liquid yield curve rose by an average of 2bps WoW. The front-end (364-day T-bill) rose by 12bps to 4.35%%, the belly (FXTN 10-61: 9.7yrs) increased by 15bps to 6.11%, while the tail (R25-01: 20.5yr) jumped 47bps to 7.22%. Secondary trading average volume jumped 64% WoW to Php8.9bn as T-bond volume almost doubled, up 81% to Php4.7bn. On the other hand, T-bill average volume rose by 49% to Php4.3bn. The Bureau of the Treasury (BoTr) awarded Php12.369bn worth of T-bills out of the P15 billion it intended to borrow last week. On the T-bond side, BoTr raised Php7.612bn out of the Php10bn program for the reissued seven-year bonds, even as the offer was oversubscribed, with total tenders by banks and other financial firms reaching P14.382bn. BoTr capped the interest rate at 6% while the issuance fetched an average of 5.976%.

Emerging Markets’ (EM) 10-year up 2bps week-on-week (WoW). Yields of EM bonds we follow were up by 2bps WoW as threats of trade war between US and everyone else intensified risk-off sentiment. Turkey suffered the highest price decline, leading to 35bps jump in its 10-yr yields. Latin America experienced some relief as 10-year yields fell WoW for Mexico (-9bps), Chile (-6bps), Colombia (-4bps), and Peru (-3bps).

USTs up 1bp WoW. US Treasuries rose by an average of 1bp last week while the 10-yr UST was flat WoW, keeping yields at 2.93% as the latest rate hike was already priced in. Continued global trade jitters could potentially encourage inflows to US treasuries given its safe haven status. Continued dovish ECB is also driving demand for US treasuries. The European Central Bank outlined plans to end its massive stimulus program by the end of the year, but said it would hold rates low until summer 2019.