Budget Uncertainties [March 11 – March 15, 2019]

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Budget Uncertainties

Outlook. Bond yields took a breather from its month-long rally last week as the market faced uncertainty with the unsigned national budget. Although recently, the House agreed to recall its version of the General Appropriations Bill (GAB) in favor of the Senate’s version. The Php3.7tn budget was in danger of getting unsigned until the later half of the year and was estimated to shave off 1.6%-2.3% in the nation’s 2019 GDP. The earliest the bill can get signed is April.

The Department of Budget Management (DBM) revised its GDP growth forecast for this year and the next from 7.0%-8.0% to 6.0%-7.0% and 6.5%-7.5%, respectively. It also expects the 364-day T-bill to range from 5.5%-6.5% in 2019 and 5.0%-6.0% in 2020 which led to the uptick last week. The Bangko Sentral ng Pilipinas (BSP) reported a surge in current account deficit to a record high of $7.9bn in full year 2018, or 2.4% of GDP, almost quadruple of 2017’s $2.1bn. (0.7% of GDP) and higher than BSP’s 1.9% of GDP to $6.4bn. Lastly, January OFW remittances rose by 4.4% YoY to $2.5bn,slower than the 9.7% growth in the same period last year but beat estimates of 4%. The FOMC and BSP’s monetary board will meet this Thursday and Friday, respectively. Both of them are expected to hold rates. We expect bond yields to be rangebound ahead of dovish central banks’ meetings.

Market review. The local benchmark yield curve rose by 5bps on average week-on-week (WoW) ahead of central banks’ meetings this week. The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) slightly widened to 359bps from 348bps in the week prior as the former edged up to 6.18%, 8bps higher, while the latter shed 3bps to 2.59%. Year-to-date, the local yield curve was down by an average of 83bps while the 10-yr was down by 89bps. Yields of ROPs were flat on average as US Treasuries which fell by 1bp on average.

Average total daily volume down by 11% week-on-week (WoW) to Php19.5bn. The liquid yield curve rose by an average of 5.3bps WoW as the front-end (364-day T-bill) fell by 2.6bps to 6.05%, the belly (FXTN 10-63: 9.5yrs) up by 8bps to 6.18%, while the tail (R25-01: 20.5yr) fell by 5bps to 6.31%. Secondary trading average volume fell by 11% to Php19.5bn dragged down by a 30.6% drop in T-bill trading to Php3.3bn. T-bond trading volume also dropped by 6% to Php16.2bn. The Bureau of the Treasury’s (BTr) fully awarded its Php20bn auction of re-issued 10-yr T-bonds. The auction fetched an average rate of 6.196% and was 2.73x oversubscribed. Lastly, the latest Php20bn T-bill auction was only partially awarded (only Php13bn of the Php20bn offered). Accepted bids for the 91-day, 182-day, and 364-day T-bills averaged at 5.786%, 5.987%, and 6.051%, 8bps, 5bps, and 4bps higher than the last auction.

Emerging Markets’ (EM) 10-year down 12bps (WoW). Yields of EM bonds we follow were down by 12bps on average on renewed risk-on sentiment. The market cheered China’s central bank’s pronouncement that it will not devalue its currency to boost exports or use it as a weapon in trade disputes. Turkey (10-year yield -23bps), Mexico (-15bps), and Colombia (-13bps) have outperformed this week, while the Philippines (-1bp), Peru (-7bps), and Indonesia (-10bps) relatively underperformed.

USTs down 1bp WoW. US Treasuries were down by 1bp WoW on average as the 10-yr UST likewise shed 3bps to 2.59% as the market anticipates a more dovish FOMC tone after its meeting this week. US economic data continued a recent pattern, with new home sales droping nearly 7% in January, far lower than consensus estimates of a 1% decline. Industrial production did not rebound as expected last February, up by just 0.1% during the month dragged by manufacturing which fell by 4%, bucking expectations of a 0.3% rise. Lastly, US CPI rose by 0.2% in February or 1.5% YoY (from 1.6% in January), the slowest record since September 2016. Core CPI, meanwhile, rose by 0.1%, short of the 0.2% forecast, and 2.1% in a YoY basis, slower than January’s 2.2%.

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