Weekly Fixed Income Summary : April 02 – 06, 2018

Rising Yield Curve

Outlook. Bond yields will remain elevated amid (1) rising expectations of a hike by the Bangko Sentral ng Pilipinas (BSP); (2) steadily rising local inflation (up 4.3% in March, based on 2012 index); (3) allayed trade war fears by Chinese President Xi Jinping, shifting money out of safe haven assets like US Treasuries; and (4) Fed hike expectations fueled by rising US inflation and a robust labor market. Investors are now seeking higher yields for holding long-term notes amid rising interest rates locally and in the US and higher local government borrowing. Borrowing in the second quarter is expected to grow by 35% quarter-on-quarter (QoQ) to Php325bn ($6.2bn), pressuring up interest rates (an estimated Php130.5bn worth of bonds matures this May alone and Php250bn for the entire year). March inflation rate of 4.3% was within the BSP’s expected range of 3.8%-4.5%. However, February trade deficit widening to $3.06bn from $1.7bn in the same month last year, dragged by exports which fell for the first time in more than a year, down 1.8% YoY to $4.66bn, added downward pressure on the peso. Inflation rates in the next few months will remain crucial to either justify the BSP’s decision to maintain or hike rates in the monetary board’s next meeting this May, the latter to ease pressure on the peso. Higher inflation expectation already reflected in recent auctions, with bidders demanding wider spreads and a defensive secondary market.

Market review. The benchmark yield curve was almost unchanged, down by just an average of 1bp week-on-week (WoW), a movement the BTr expected after the Holy Week, a period when people usually need more cash on hand. The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) narrowed to 318bps from 323bps, as the former fell by 5bps to 5.95% (done) and up by 25bps year-to-date (YTD), while the latter was unchanged at 2.77%. Yields of ROPs fell by an average of 1bp, tracking the movement in USTs, also down by 1bp. The recent Php10bn auction of newly-issued 7-yr bond was twice oversubscribed but was only partially awarded (Php7.9bn) as the Bureau of the Treasury capped accpeted rates at 5.75%. The average accepted bid rate was 5.712%, 133 bps higher than the last auction of similar notes which fetched an average bid rate of 4.39%.

Total daily traded volume down 16% week-on-week (WoW) to Php6.2bn. The liquid yield curve fell by an average of 11bps on thin trading volumes. The bond market remained cautious amid trade war noise that dominated headlines. The front-end (FXTN 05-72: 1yr) rose by 32bps to 3.26%, the belly (FXTN 10-61: 9.7yrs) up by 23bps to 6.11%, while the tail (R25-01: 20.5yr) down 64bps to 6.52%. Secondary trading volume fell by 16% to Php6.2bn, as T-bill trading more than halved to Php856mn, down by 66% WoW, slightly offset by T-bond trading volume that recovered by 11% to Php5.4bn. Still these volumes are on the low side, reflecting the market’s defensive stance. The BTr fully awarded its Php10bn auction of 3-yr bonds, which fetched an average bid rate of 4.63% and was twice oversubscribed. On the other hand, the bureau fully awarded its Php5bn 91-day T-bill auction last Tuesday (April 10) while completely rejecting all the bids for the 182-day and 364-day auction. Average bids for the 91-day bill was capped at 3.35% from the last auction’s 3.191%, 16bps higher. Total tenders matched the offer size, but bids were mostly for the 91-day bill.

Emerging Markets’ (EM) 10-year yields down 7bps week-on-week (WoW). Yields of EM bonds we follow were down by 7bps WoW on average after Chinese President Xi Jinping’s less aggresive stance regarding the brewing trade war. Peru (10-year yield: -13bps), Turkey (-11bps), and Mexico/Colombia (-10bps) outperformed last week, while Brazil (10-year yield -1bp), Indonesia (-4bps), and the Philippines (-5bps) relatively underperformed.

USTs down by 1bp WoW. US Treasuries fell by an average of 1bp WoW, while the 10-yr UST was unchanged at 2.77% on a healthy labor market report masked by disappointing new jobs numbers and a friendlier tone by the Chinese president last Friday. The speech eased tensions between the US and China after weeks of exchanging trade threats. Meanwhile, the latest jobs report showed 103,000 new jobs generated last month, below expectations of 178,000 and a third of February’s 326,000, greatly affected by weather and seasonality. However, unemployment remained at an all-time low of 4.1%. Wage growth remained steady at 2.7% YoY. Data also showed last Tuesday that U.S. producer prices increased more than expected in March, boosted by a rise in the cost ofservices such as healthcare and airline fees. The producer price index for final demand rose 0.3% last month after increasing 0.2% in February. The 5-yr and 30-yr UST spread has flattened to 39.6 basis points. That’s the narrowest gap since late December 2011. Read full article here.