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First Metro Weekly Fixed Income Summary and Outlook – January 29 – February 02, 2018

Outlook. There’s continuing upward pressure on local bond yields this week due to higher-than-expected inflation of 4.0% in January, a big surprise given consensus expectation of 3.3% and the BSP likely doing a preemptive rate hike come Thursday.

The sell-off in equities may not necessarily drive investors to the bond market as in the US, where the 10-year US Treasury (UST) peaked at 2.85% last week but returned to 2.68% earlier this morning (February 6). That’s ahead of the BSP policy resetting this week. The Dow Jones index shed 4.6% yesterday (February 5).

Locally, the belly (5-yr) continued to rise to the level of the liquid 10-yr (10-61) at 5.0%. There is fear inflation may overshoot with the impact of all the packages of TRAIN. Nevertheless, appetite is still in the short-end, with yields of the 3-mo, 6-mo, and 1-yr benchmark rates down by an average of 14bps. But the liquid ISIN are mixed.

Inflation last January quickened to 4.0%, the highest level since 2014, up from 3.3% in December and exceeded expectations of 3.3%. Food prices and oil prices were up last month. This was also at the upper end of the BSP’s forecast range of 3.5%-4.0%. Core inflation is up to 3.9% from 3.0%.

Market review. The spread between the 10-yr US Treasury (UST) and the 10-yr local benchmark held steady at 337bps as the yield of the 10-yr UST reached a 10-yr high of 2.85%, 19bps higher WoW pushed due to wages rising at the fastest rate since 2009.

On the other hand, the local 10-yr benchmark rose by 17bps to 6.21%. The yield of the 10-hyr UST was lower yesterday (February 5) to 2.69% on haven asset buying. Yields of ROPs tracked USTs, with the former up by an average of 16bps WoW while the latter rose by 11bps WoW on average.

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