Weekly Fixed Income Summary : June 18 – 22, 2018

Local Yields Soar on BSP Hike

Outlook. We expect upward pressure on bond yields to persist this week following the Bangko Sentral’s (BSP) rate hike last week, the second this year which brought the policy rate to 3.5%. Consensus before the monetary board meeting was that the BSP will stand pat (but another hike sometime within the year was expected), although there was already a growing sense of urgency after the meeting was rescheduled a day earlier following the Fed’s second hike of the year last May. We expect the move to temper the peso’s continued hemorrhage this year, which touched a 12-year low at Php53.50 last June 18. The peso improved by 0.3% to php53.29 after the hike by week’s close. Standard & Poor (S&P) and Fitch’s BMI Research expect another 25-bp hike to 3.75% within the year to curb inflation and ease pressure on the peso.

Market review. The local benchmark yield curve rose by 27bps week-on-week (WoW) on average and up by 104bps year-to-date (YTD). The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) widened to 401bps last week from 330bps as the former rose by 71bps to 6.91% (bid) and up by 121bps YTD, while the latter was down by 3bps WoW to 2.90%. Yields of ROPs rose by an average of 2bps, bucking the trend in USTs which shed 1bp on average.

Average total daily traded volume down 51% week-on-week (WoW) to Php4.4bn. The liquid yield curve rose by an average of 18bps WoW. The front-end (364-day T-bill) rose by 2bps to 4.31%, the belly (FXTN 10-61: 9.7yrs) rose by 52bps to 6.64%, while the tail (R25-01: 20.5yr) rose by 10bps to 7.32%. Secondary trading average volume was down by 51% WoW to Php4.4bn as T-bill volume decreased by 64% to Php1.5bn and T-bond average volume fell by 39% to Php2.8bn. The Bureau of the Treasury’s (BTr) latest Php10bn auction of reissued 20-yr T-bond was only partially-awarded despite being 1.4x oversubscribed. Accepted bids averaged at 6.979% and were capped at 7.0%. The bureau awarded Php4.1bn of the Php10bn. Lastly, the latest Php15bn auction of 91-day, 182-day, and 364-day T-bills was only partially-awarded despite being 1.5x oversubscribed. The 91-day was fully-rejected, the 364-day only partially-accepted, while only the 192-day was fully-accepted. Accepted rates for the 182-day averaged 3.766%, while the 364-day was capped at 4.357%.

Emerging Markets’ (EM) 10-year down 8bps week-on-week (WoW). Yields of EM bonds we follow were down by 8bps WoW amid a broad-based dollar rally which waned by the end of the week on renewed trade tensions. Mexico (10-year yield -28bps), South Africa (-14bps), and Poland (-7bps) outperformed last week, while Czech (10-year yield +10bps), Israel (+10bps), and Hungary (+9bps) underperformed.

USTs down 1bp WoW. US Treasuries were unchanged, down by just 1bp WoW on average, while the 10-yr UST shed 4bps WoW to 2.89%. Trade tensions between the US and China was renewed following Trump’s instruction to draw up another $200bn in additional tariffs on Chinese goods, to which a Chinese commerce ministry official warned that they will respond in kind. Later in the week, Trump further exacerbated trade jitters when he warned that the US will place a 20% tariff on EU auto imports if the long-standing 10% tariff on US car imports to the EU is not taken down. Meanwhile, US home sales fell by 0.4% in May amid declining inventories and a shortage of properties. US jobless claims clocked in at 218,000 versus 220,000 and unemployment at an 18-year low of 3.8%, showing a tight labor market and nearing the Fed’s target of 3.6%.