Weekly Fixed Income Summary : July 15 – July 19, 2019

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Rates Have Further to Fall

Outlook. Expect local bond yields to remain rangebound with a downward bias as both local and international markets try to gauge the extent of the Fed cut by the end of July. Markets priced in a 71% chance of a 50-bp Fed cut last week after New York Fed President Williams said that it would be better to act quickly at the first sign of economic distress, which was echoed by other FOMC members later on. Odds of a 50-bp hike have since gone back to 23% (as of July22) after a clarification that the statement did not just pertain to the upcoming meeting but for the rest of the year. Recall that Fed Chair Powell was already dovish during his congressional testimony while indicating the potential for more reductions but would avoid a bigger move as they weigh concerns on slowing economic growth, trade policies uncertainties, and risks from a more continued shortfall in inflation from the 2% target. US retail sales rose 0.4% in June as households increased purchases of motor vehicles and variety of other goods. Strong gain in core retail sales last month suggests an increase in consumer spending in the next quarter.

As such, the Bangko Sentral (BSP) now faces significant pressure to follow suit in its next meeting in August 8, which BSP governor Diokno himself said was just a matter of timing. As government spending ramps up, the downward trajectory of bond yields proves advantageous for the government’s borrowing costs. The Bureau of the Treasury (BTr) reported a Php41.8bn budget deficit in June 2019, 22.9% lower than the same period last year, which brought YTD deficit to Php42.6bn, 78% lower YoY due to the delay of the budget passage. Philippines’ gross borrowings is expected to reach a record-high Php1.4tn in 2020 from Php1.2tn this year to finance the government’s wider budget deficit cap equivalent to 3.2% of GDP as it boosts spending on public goods and services and pays more amortization for outstanding debt. Philippine government is considering to issue up to $1bn worth of samurai bonds by late July or early August. National Treasurer De Leon said that the Treasury is looking into three tenor buckets, ranging from 3, 5, 7 or 10 years.

Market review. The local benchmark yield curve fell by 6bps on average week-on-week (WoW) following Fed’s expected rate cut this month. The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) slightly narrowed to 289bps from 290bps in the week prior as the former drop 8bps WoW to 4.94% while the latter also shed 7bps to 2.05%. Year-to-date, the local yield curve was down by an average of 215bps while the 10-yr was down by 213bps. Yields of ROPs were down by 2bps on average while US Treasuries were down by 5bps on average.

Average total daily volume flattish, up by 40.3% week-on-week (WoW) to Php38bn. The liquid yield curve fell by an average of 5.9bps WoW as the front-end (364-day T-bill) was down by 4bps to 4.77%, the belly (FXTN 10-63: 9.5yrs) down by 8bps to 4.94%, while the tail (R25-01: 20.5yr) shed 2.4bps to 5.07%. Secondary trading average volume was up by 40.3% to Php38bn as T-bond volume rose 39% to Php34bn, while T-bill volume rose 53% to Php4.2bn. The Bureau of the Treasury’s (BTr) fully awarded its latest Php20bn auction of reissued 7-yr T-bonds at an average yield of 4.845%, lower than the prevailing secondary market rate. The auction was 3.5x oversubscribed. Lastly, the latest Php15bn auction of 91-day, 182-day, and 364-day T-bills was fully awarded at average rages of 3.769%, 4.100%, and 4.519%, respectively, 11bps, 14bps, and 22bps lower than the previous auction. The auction was 5.0x oversubscribed.

Emerging Markets’ (EM) 10-year down 8bps (WoW). Yields of EM bonds we follow were down 8bps on risk-on sentiment. Turkey (10-yr yield -54bps), Indonesia (-7bps), and Mexico (-4bps) outperformed last week, while Peru (+3bps), Philippines (+1bp), and Chile (+1bp) underperformed.

USTs down 5bps WoW. US Treasuries were down by 5bps WoW on average as the 10-yr UST likewise fell by 7bps to 2.05% as industrial production and manufacturing was down by 1.7% and 2.3% year-to-date, respectively. But year-on-year, the former was up by 1.3%, while the latter also up by 0.4%.

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