Weekly Fixed Income Summary : June 25 – 29, 2018

Pressure Build-up on Local Yields

Outlook. Upward interest rate pressures are building up ahead of the June inflation data release on Thursday, which the Department of Finance (DoF) expects to clock in at 4.9% from 4.6% in May. Consensus is currently at 4.8%. If either of the forecasts are hit, it would be a new high for the year and would go further above the Bangko Sentral’s (BSP) forecast this year of 4.6%. and increases the odds of another rate hike during the next monetary board meeting this August. The DoF also revised its current account deficit estimate in 2019 from 3.0% to 3.2%, which may further put pressure on the peso, currently the worst performing currency in the region, down 6.8% year-to-date (YTD). The estimated overall balance of payments (BoP) position for the year was also revised to a deficit of $1.5bn from $1bn. After two consecutive rate hikes in the past two meetings, expectations of a third hike in the next monetary board meeting continue to mount to curb inflation and ease pressure on the peso.

Market review. The local benchmark yield curve fell by 6bps week-on-week (WoW) on average and up by 98bps YTD. The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) narrowed to 357bps last week from 401bps as the former fell by 48bps to 3.42% (done) from a bid rate of 6.91% in the prior week, while the latter was down by 5bps WoW to 2.85%. Yields of ROPs rose by an average of 4bps, bucking the trend in USTs which shed 3bps on average.

Average total daily traded volume doubles week-on-week (WoW) to Php8.7bn. The liquid yield curve fell by an average of 5bps WoW from a high base in the week prior. The front-end (364-day T-bill) rose by 16bps to 4.47%, the belly (FXTN 10-61: 9.7yrs) shed 29bps to 6.35%, while the tail (R25-01: 20.5yr) likewise fell by 3bps to 7.29%. Secondary trading average volume recovered, doubling to Php8.7bn as T-bond volume rose by 94% to Php5.5bn and T-bill average volume increased by 108% to Php3.2bn. The Bureau of the Treasury’s (BTr) latest Php15bn auction of reissued 10-yr T-bond was completely rejected as bid rates peaked at 7.625%, 127.5bps higher than the previous average accepted and secondary market rate of 6.35%. Total tendered amount also fell short of the programmed Php15bn at just Php14.8bn. On the other hand, the 90-day T-bill auction was fully-awarded with an average rate of 3.404%. The 182-day and 364-day T-bills were only partially awarded with average rates of 3.937% and 4.566%, respectively. The auction was 1.7x oversubscribed. Lastly, the 20-yr T-bond auction last week was only partially-awarded despite being 1.4x oversubscribed. Accepted bids averaged at 6.979% and were capped at 7.0%. The Bureau awarded Php4.1bn of the Php10bn.

Emerging Markets’ (EM) 10-year up 3bps week-on-week (WoW). Yields of EM bonds we follow were up by 3bps WoW as trade war worries continued to sour investors’ mood with EMs. Brazil (10-year yield -25bps), Mexico (-21bps), and Peru (-13bps) outperformed last week, while Turkey (10-year yield +44bps), Indonesia (+25bps), and Argentina (+24bps) underperformed.

USTs down 3bps WoW. US Treasuries were down by 3bps WoW on average, while the 10-yr UST shed 5bps WoW to 2.85%, as investors sought refuge on safe haven assets amid spat between the US and China. The latest entry on the US-China trade war chronicle was the Trump administration’s proclamation last week to bar Chinese firms from investing in U.S. technology companies and imposition of new limits on U.S. technology exports to China. The U.S. administration is also reportedly looking into drafting a bill that would allow the White House to unilaterally increase tariffs without congressional consent, a move that would put the US out of the World Trade Organization’s (WTO) rules and policies. A small respite came from the US Institute for Supply Management’s (ISM) manufacturing index which showed an increase to 60.2 last month form 58.7 in May. However, first quarter GDP number was also revised downwards to 2.0% from 2.2% as small contributions from inventory growth and net exports were reduced.