Weekly Fixed Income Summary : Jan. 29 – Feb. 02, 2018

First Metro Weekly Fixed Income Summary and Outlook - January 29 - February 02, 2018

Outlook. There’s continuing upward pressure on local bond yields this week due to higher-than-expected inflation of 4.0% in January, a big surprise given consensus expectation of 3.3% and the BSP likely doing a preemptive rate hike come Thursday. The sell-off in equities may not necessarily drive investors to the bond market as in the US, where the 10-year US Treasury (UST) peaked at 2.85% last week but returned to 2.68% earlier this morning (February 6). That’s ahead of the BSP policy resetting this week. The Dow Jones index shed 4.6% yesterday (February 5). Locally, the belly (5-yr) continued to rise to the level of the liquid 10-yr (10-61) at 5.0%. There is fear inflation may overshoot with the impact of all the packages of TRAIN. Nevertheless, appetite is still in the short-end, with yields of the 3-mo, 6-mo, and 1-yr benchmark rates down by an average of 14bps. But the liquid ISIN are mixed. Inflation last January quickened to 4.0%, the highest level since 2014, up from 3.3% in December and exceeded expectations of 3.3%. Food prices and oil prices were up last month. This was also at the upper end of the BSP’s forecast range of 3.5%-4.0%. Core inflation is up to 3.9% from 3.0%.

Market review. The spread between the 10-yr US Treasury (UST) and the 10-yr local benchmark held steady at 337bps as the yield of the 10-yr UST reached a 10-yr high of 2.85%, 19bps higher WoW pushed due to wages rising at the fastest rate since 2009. On the other hand, the local 10-yr benchmark rose by 17bps to 6.21%. The yield of the 10-hyr UST was lower yesterday (February 5) to 2.69% on haven asset buying. Yields of ROPs tracked USTs, with the former up by an average of 16bps WoW while the latter rose by 11bps WoW on average. Read full article here.