Weekly Fixed Income Summary : October 8 – October 12, 2018

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Tight to Tighter

Outlook. Yields continued to climb last week as risk-off sentiment cast a cloud over the market. Investors sought safe haven assets amid heightened negative sentiment brought about by the US-China trade war, while inflated inflation expectations kept local bond yields elevated. Inflation was expected to have peaked in September (6.7%) and while the fourth quarter is a seasonally high inflation period due to increased spending, the relatively high base from last year and price mitigation measures -- especially with rice with the recent rice imports -- could keep inflation from overshooting. Nevertheless, we expect markets to remain defensive and keep bonds sidelined.

Last week, government moved to suspend the second tranche of fuel excise taxes to temper inflation expectations and provide relief to the market. This suspension will cost the government an estimated Php42bn in revenues in 2019, when the second tranches was supposed to take into effect. So as not to breach its target deficit of 3.2% in 2019, the government is eyeing to cut non-infrastructure programs next year. With the government’s need for more funding, yields could continue to trend up and peak next year. In the data front, OFW remittances grew by 2.4% to $19.06bn year-to-date (YTD) last August, while remittances for the month alone fell by 0.9% year-on0year (YoY). The pace of remittances growth has been noticeably slower this year with August’s YTD growth one of the slowest pace since 2013, behind only last February’s growth. This casts a cloud over the foreign exchange market and underscores the urgency of foreign borrowing to replenish the diminishing gross international reserves which is at its lowest level since 2016.

Market review. The local benchmark yield curve rose by 38bps on average week-on-week (WoW) on risk-off sentiment. The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) widened even further to 491bps from 457bps in the prior week as the former rose by 26bps to 8.06% (bid; latest interpolated rate at 7.87%) while the latter shed 8bps WoW to 3.15%. Yields of ROPs were flat on average as USTs fell by 3bps on average.

Average total daily traded down 18% week-on-week (WoW) to Php3.5bn. The liquid yield curve rose by an average of 57bps WoW as the front-end (364-day T-bill) rose by 31bps to 6.0%, the belly (FXTN 10-63: 9.5yrs) up by 13bps to 7.88%, while the tail (R25-01: 20.5yr) spiked to 8.84%, up 102bps WoW. Secondary trading average volume fell by 18% to Php3.5bn as average T-bond volume shed 80% to Php548mn, the lowest level this year. On the other hand, T-bill volume rose by 87% to Php2.9bn. The latest Php15bn auction of 91-day, 182-day, and 364-day T-bills was partially awarded with the bureau fully rejecting the bids for the 91-day T-bill while partially awarding the 184-day and 364-day securities at an average rate of 5.894% and 6.256%, respectively. The auction was 1.2x oversubscribed.

Emerging Markets’ (EM) 10-year dpwn 4bps (WoW). Yields of EM bonds we follow were down by 4bps WoW led by Argentina (10-year yield -232bps), Turkey (-141bps), and Brazil (-51bps), while Pakistan (10-year yield +86bps), Indonesia (+38bps), and Philippines (+26bps) underperformed.

USTs down 3bps WoW. US Treasuries were down by 3bps WoW on average as the 10-yr UST fell by 8bps to 3.15%, fueled by global risk-off sentiment, as was evident in the sell-off in the equities market which may have funneled into the bonds market. Also, US CPI unexpectedly moderated in September, clocking in its lowest YoY rate of 2.3% since February. This was a lot lower than August’s 2.7% and forecasts of 2.4%. The data came on the heels of record data on ISM non-manufacturing index (61.6), manufacturing index (59.8) , and unemployment (3.7%) in August. Odds for a rate hike in December has barely moved at 81.4% from 84% in the prior week.

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