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First Metro Weekly Fixed Income Summary and Outlook – February 05 – 09, 2018

Outlook. Bond yields to remain elevated. The short-end rose, reflected in higher T-bill rates in the latest auction. Government had to reject to temper it.

T-bill auction results: Average bid rates were 2.670%, 2.854%, and 3.04%, respectively, all higher than the previous auction’s average rates. Bid-to-cover was 1.1x. The Php20bn auction of the 7-yr T-bond was fully-rejected as bid rates reached as high as 5.500%. The auction was 1.275x oversubscribed.

Market review. The long-end also higher, 10-yr benchmark at 6.53%; spread wider at 370 bps versus the 10-yr US Treasury (UST) at a four-year high of
2.95%, up 32bps higher week-on-week (WoW) on inflation jitters. Yields of ROPs rose by an average of 20bps.

Belly of Yield Curve Acting Up . Total daily traded volume down 38% week-on-week (WoW) to Php12.4bn. Peso yield curve’s front-end (FXTN 05-72: 1yr) down by 3bps to 2.71%, the belly (FXTN 10-61: 9.7yrs) soared to 6.44%, 144bps higher WoW, while the tail (R25-01: 20.5yr) was down by 37bps to 6.00%. Secondary trading volume was down by 38% WoW to Php7.7bn, dragged mainly by T-bonds which fell by 40% to Php6.1bn, while T-bill likewise decreased by 29% to Php1.5bn. Participants were defensive as shown by dropping volumes in the secondary market.

Emerging Markets’ (EM) 10-year yields up 21bps week-on-week (WoW). Yields of EM bonds we follow rose 21bps WoW on average on global risk-off sentiment, triggered by Wall Street’s panic selling last week. Hungary (10-year yield -22bps), India (-10bps), and Czech Republic (-6bps) outperformed last week, while Turkey (10-year yield +26bps), Peru (+8bps), and Mexico (+6bps)underperformed.

Strength in US Economy Evident. Fed Hike In March Almost Sure. Data showed US labor market strength. Weekly jobless claims fell to a 45-yr low of 221,000 vs expected 232,000. The Institute for Supply Management’s (ISM) service index showed an expansion of 59.9, a 13-year high, versus the expected 56.5. The yield of the 10-yr UST held steady at 2.83% last week. Odds for a hike this March rose to 78% from last week’s 70%.

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