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Yield Curve Mildly Down

Outlook. Despite the influx of fresh supply, the yield curve instead trended down, giving a strong indication that the lower inflation outlook weighed more on market sentiment. The government has a programmed borrowing of Php1.2tn this year, 20% higher than 2018’s to fund its infrastructure program, with Php360bn scheduled for the first quarter or Php30bn more monthly compared to the same period last year.

Inflation expectations this year and the next continue to trend down as fuel and food prices, particularly rice, declined from highs last September 2018. December’s inflation print of 5.1% was the lowest since May and brought 2018’s average to 5.2%, in line with BSP forecast for the year but beyond the 2%-4% target band. This was also lower than consensus estimate of 5.6%. Upside risks to inflation this year is still present as 2019 is an election year, but the high base from 2018 and the decline in global oil (~30% from peak in October) and rice (~12% from peak in end-September) plus the Bangko Sentral’s monetary action last year (150-bp hike) should keep inflation tethered. As such, we expect the yield curve to continue to flatten.

A possible reversal of the Fed’s previously believed policy tightening this year could help sustain the downtrend in local bond yields. Recall that the Fed previously guided for at least three rate hikes this year and one more in 2020, but Fed officials’ recent tone have turned dovish as global growth prospects soured.

Market review. The local benchmark yield curve fell by 9bps on average week-on-week (WoW) following the release of lower-than-expected December inflation print. The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) stayed at 427bps as the former fell by 5bps to 6.94% while the latter likewise fell by 5bps to 2.67%. Yields of ROPs fell by 10bps on average, tracking the movement in US Treasuries which likewise shed 2bps on average.

Average total daily up by 26% week-on-week (WoW) to Php11.6bn. The liquid yield curve fell by an average of 8bps WoW as the front-end (364-day T-bill) shed 2bps to 6.77%, the belly (FXTN 10-63: 9.5yrs) down by 5bps to 6.94%, while the tail (R25-01: 20.5yr) shed 17bps to 7.37%. Secondary trading average volume rose by 26% to Php11.6bn as average T-bond volume increased by 28% to Php8.6bn. T-bill volume likewise rose by 20% to Php3bn. The latest Php15bn auction of 91-day, 182-day, and 364-day T-bills was only partially awarded amid mixed reception. Only the 182-day and 364-day were fully-awarded at an average rate of 6.424% and 6.641%, lower than the prevailing secondary market rate. On the other hand, the 91-day T-bill was only partially awarded and was capped at an average of 5.411%. The auction was 1.5x oversubscribed. Lastly, the Bureau of the Treasury (BTr) fully awarded Php20bn worth of 10-yr T-bonds at an average rate of 6.875%, in line with market expectation, and another Php20bn will be offered via tap facility. The auction was 2.6x oversubscribed.

Emerging Markets’ (EM) 10-year down 10bps (WoW). Yields of EM bonds we follow were down by 10bps on average WoW as the wait-and-see position by the Fed fueled risk on sentiment. Brazil (10-year yield -19bps), Mexico (-17bps), and Colombia (-15bps) outperformed, while Turkey (10-year yield +10bps), Peru (-7bps), and the Philippines (-9bps) relatively underperformed.

USTs down 2bps WoW. US Treasuries were down by 2bps WoW on average as the 10-yr UST likewise shed 5bps to 2.67% as the market sought safe haven assets amid US-China trade negotiation uncertainty. Recent US economic data also sent mixed signals: non-farm jobs rose by 312,000 in December, way higher than the 177,000 expected but unemployment rose by 0.2% to 3.9%. Hourly wage growth rose by 3.2%, up from 3.1% in November. December ISM manufacturing data fell to 54.1 from 59.3 in November and the lowest since 2016, further confirming the slowdown in business investments due to trade war jitters. Although, Trump recently tweeted that it has made progress in trade talks. Fed Chair Powell also stressed that the Fed will focus on economic conditions this year and respond accordingly, a tone the market took as more dovish than the previously guided at least three rate hikes this year.

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