Weekly Fixed Income Summary: July 4-8, 2016

Bonds Outlook. We expect bond yields to trade sideways as EM’s remain a strong option for foreign investors to put their money in amid global concerns over Brexit. The Philippines remains attractive because of its minimal exposure to the United Kingdom and/or the European Union coupled with the new administration’s bullish stance on government expenditures. Furthermore, the June core inflation rate rose to 1.9% from 1.6%, closer to the BSP’s 2016 inflation target rate of 2%-4%. This is in line with the central bank’s assessment that inflation will move towards the target over the policy horizon.

We expect the BSP to hold the policy rates steady for the rest of the year. BSP Governor Armando Tetangco, Jr., on the heels of July 7’s auction, said that the TDF auctions have now reached sustainable levels compared to the first few auctions under the new IRC system that were way oversubscribed. The bid-to-cover ratio of the 7-day tenor decreased to 6.025% from 6.138% in June 29’s auction, while the 28-day’s ratio declined to 4.056% from 4.598%. Short-term deposit auctions’ volumes for the third quarter increased to Php50bn from June’s Php30bn, also consistent with the BSP’s intent to move interest rates closer to the policy rate.

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