First Metro Weekly Fixed Income Summary and Outlook – February 12 – 16, 2018
Outlook. Interest rate pressures rising but the reserve requirement is acting like a sort of damper. Banks have not actually hiked their mortgage rate, although auto rates have inched up a bit. The Bureau of Treasury has been doing partial awards, also to temper the rate rise.
The reserve requirement ratio (RRR) cut of 1% released Php90bn in new liquidity. It might fan inflation, at a high 4% last January, but the BSP is set to siphon off liquidity through a 14 day borrowing instrument. Market is pricing BSP hike of 25 bps this March, viewed as helping to shore the peso which close at a 12-year low of Php52.24.
Market review. The benchmark yield curve rose by an average of 14bps week-on-week (WoW). The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) was wider at 381bps from 370bps, as the former rose by 18bps to 6.71% while the latter rose slower by 7bps to 2.90%, as it is seen to approach 3%, ahead of the Fed hike in March. Yields of ROPs rose by an average of 11bps, tracking movements in USTs.
Defensive trading on the front end. Total daily traded volume down 26% week-on-week (WoW) to Php5.7bn. The peso yield curve’s front-end (FXTN 05-72: 1yr) was up by 7bps to 2.78%, the belly (FXTN 10-61: 9.7yrs) soared to 6.64%, 20bps higher WoW, while the tail (R25-01: 20.5yr) was up by 46bps to 6.46%. Secondary trading volume was down by 26% WoW to Php5.7bn as T-bond trading was halved to Php2.9bn, while T-bill trading rose by 80% to Php2.8bn. Lower volumes for the second straight week showed defensiveness in the secondary market. The most recent Php20bn auction (Feb 20) of 20-yr bonds was partially awarded at Php8.85bn with an average coupon rate of 6.50%. Bid-to-cover was 1.14x.
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