Weekly Fixed Income Summary : July 30 – August 03, 2018

July Inflation Cements

August BSP Hike

Outlook. There is strong upward bias on the yield curve as July inflation clocked in at 5.7%, beating consensus expectation of 5.5%, near the top-end of the Bangko Sentral’s (BSP) forecast range of 5.1%-5.8%, higher than June’s 5.2%, and a five-year high. Food and non-alcoholic beverages led the growth at 7.1%. The high figure has all but cemented a 50-bp hike this August 9, when the BSP’s monetary board meets again, a move that is expected to buoy the Philippine peso that dipped by as much as 6% this year and curb inflation from overshooting. The strong hawkish stance by BSP Governor Espenilla helped the peso recover some ground, up 0.43% to Php53.1 against the dollar for the month of July, and spurred slight buying at the tail-end, down by an average of 8bps week-on-week (WoW) as Espenilla’s statement relieved investors that have been calling for more hikes. Philippine long-term growth prospects remain dim, especially with charter change noise, reflecting on a flatter tail. Analysts also noted renewed trade war tensions between the US and China and a dovish Bank of Japan (BoJ) contrary to hawkish expectations could have also contributed to the buying.

Market review. The local benchmark yield curve was unchanged on average week-on-week (WoW) ahead of the BSP monetary board meeting. The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) narrowed to 350bps from 362bps in the prior week as the former fell by 20bps to 6.45% (done), while the latter was flat, down by just 1bp WoW to 2.95%. Yields of ROPs also were also flat, just down by 1bp on average, tracking the movement of the UST curve which was also unchanged last week.

Average total daily traded volume up 79% week-on-week (WoW) to Php8.9bn. The liquid yield curve fell by an average of 1bp WoW as trading volume recovered. The front-end (364-day T-bill) rose by 4bps to 4.87%, the belly (FXTN 10-61: 9.7yrs) fell by 24bps to 6.36%, while the tail (R25-01: 20.5yr) was flat at 7.39%, as a strong BSP policy response has already been priced in. Secondary trading average volume rose by 79% to Php8.9bn as T-bond volume more than doubled (up 116%) to Php4.5bn while T-bill volume likewise rose by 53% to Php4.4bn. Last week, the Bureau of the Treasury’s (BTr) rejected all bids for the reissued 20-yr bond with bid rates reaching an average of 7.390%, higher than the previous auction. The auction was 1.3x oversubscribed for the Php15bn offered. Lastly, the latest Php15bn auction of 91-day, 182-day and 364-day T-bill was fully awarded at average bid rates of 3.290%, 4.186%, and 4.899%, respectively, more or less the same level as the previous auction. The auction was three times oversubscribed.

Emerging Markets’ (EM) 10-year up 7bps (WoW). Yields of EM bonds we follow were up by 7bps WoW on average amid renewed trade tensions between the US and China. The Philippines (10-year yield -20bps), China (-5bps), and Poland (-5bps) outperformed last week, while Turkey (10-year yield +101bps), Argentina (+28bps), and Brazil (+27bps) underperformed.

USTs flat WoW. US Treasuries were unchanged WoW on average, while the 10-yr UST was likewise flat, just down by 1bp WoW to 2.95%, as the Fed kept rates steady as expected during its meeting last week. The Fed changed its description of the US economy from ‘solid’ to ‘strong’, raising the odds for a Fed hike this September to 94% and another hike in December to 66% from 88% and 51%, respectively. News of increased borrowing in the second half also spooked investors -- second half borrowing is now expected to total $769bn, $56bn higher than April’s estimate, 63% higher during the same period last year, and the most since July-December 2008’s $1.1tn. This will also bring 2018’s total borrowings to $800bn, 14% higher YoY, and puts the US on track to touch $1tn in 2019 and past that in 2020. The Treasury is boosting sales of US debt to help finance a widening budget gap after Trump signed $1.5tn in tax cuts last year and after Congress approved a $300bn spending increase. In the data front, new jobs added last July fell short of expectations, clocking in at 157,000 vs 190,000 expected, but employment fell back to 3.9%. Average hourly wage grew by 2.7%, the same pace as last June.