Recession Fears [March 18 – March 22, 2019]

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Recession Fears

Outlook. A more dovish Fed and weak economic outlook led to a yield curve inversion -- a recession signal -- in the US (UST 1-mo: 2.49%, 3-mo: 2.46%, 6-mo: 2.48%, 1-yr: 2.45%, 3-/5-yr: 2.24%, 10-yr: 2.44%) which in turn spooked local investors. The Fed cut its forecast to no rate hikes for this year from two just three months ago, while the market priced in one 25-bp cut this year. Aside from holding rates steady, the Fed also downgraded its GDP growth forecast this year to 2.1% from 2.3% and inflation forecast to 1.8% from 1.9%.

Local bond yields followed suit, lowering by an average of 10bps, after the Bangko Sentral (BSP) also held rates steady. A reserve requirement cut, likewise, did not materialize. As global bond yields revisited lows (10-year UST dipped to 14-month low at 2.50%; 10-year German government bund declined to 0%, lowest since 2016;10-year Japan government bond yield at -0.06%, lowest since 2016), analysts believe there is now room for a BSP cut, especially in the face of a delayed national budget enactment that could threaten GDP growth. Expect significant downward pressure on bond yields.

Market review. The local benchmark yield curve fell by 9bps on average week-on-week (WoW) following dovish central bank meetings. The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) narrowed to 352bps from 359bps in the week prior as the former reached a one-year low of 5.96%, 22bps lower WoW, while the latter shed 15bps to 2.44%, a 14-month low. Year-to-date, the local yield curve was down by an average of 92bps while the 10-yr was down by 110bps. Yields of ROPs were down by 11bps on average tracking US Treasuries which fell by 9bps on average.

Average total daily volume up 75% week-on-week (WoW) to Php34bn. The liquid yield curve fell an average of 10bps WoW as the front-end (364-day T-bill) ticked up slightly by 2bps to 6.08%, the belly (FXTN 10-63: 9.5yrs) down by 22bps to 5.96%, while the tail (R25-01: 20.5yr) shed 21bps to 6.10%. Secondary trading average volume rose by 75% to Php34bn, the highest this year, as T-bond trading volume almost doubled (93.3%) to Php31.4bn as T-bill trading volume declined by 16% to Php2.7bn. The Bureau of the Treasury’s (BTr) fully awarded its Php20bn auction of re-issued 7-yr T-bonds. The auction fetched an average rate of 5.934%, lower than the secondary market rate and was 3.7x oversubscribed. Lastly, the latest Php20bn T-bill auction was only partially awarded (182-day and 364-day fully-awarded, 91-day partially awarded). Accepted bids for the 91-day, 182-day, and 364-day T-bills averaged at 5.787%, 5.927%, and 6.04%, 1bp, 4bps, and 1bp higher than the last auction.

Emerging Markets’ (EM) 10-year down 8bps (WoW). Yields of EM bonds we follow were down by 8bps on average as funds flowed to fixed income securities. With recession fears in the US and slower growth in other developed economies, EM bonds could become attractive again yield-wise. Colombia (10-year yield -20bps), Mexico (-19bps), and Indonesia (-16bps) outperformed last week, while Turkey (+42bps), Peru (-9bps), and the Philippines (-11bps) relatively underperformed.

USTs down 9bps WoW. US Treasuries were down by 9bps WoW on average as the 10-yr UST likewise dipped by 15bps to 2.44% as the US yield curve inverted. Following the Fed’s meeting last week, Fed Chair Powell acknowledged that growth in U.S. consumer and business spending had slowed in recent months and pointed to a more pronounced slowdown in European economies. Recall that new home sales dropped nearly 7% in January, even lower than a 1% decline expected, and industrial production did not rebound as much as expected last February, up by just 0.1%, while the PMI slid to a 21-month low in March (52.5 from 53 in February). US CPI rose by 0.2% in February or 1.5% YoY (from 1.6% in January), the slowest record since September 2016, while core CPI rose by 0.1%, short of the 0.2% forecast, and 2.1% in a YoY basis, slower than January’s 2.2%. An inverted yield curve does not mean a recession is imminent but that one is likely over the next year or so. The recent one has been the biggest since the 2008 crisis.

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