Weekly Fixed Income Summary : May 14 – 18, 2018

Sizing Up Second BSP Hike

Outlook. We expect bond yields to remain elevated as US Treasuries (UST) continue to climb amid $99bn in new supply this week and as investors await the Fed minutes to be released on Wednesday (Thursday, PH time). USTs climbed to seven-year highs last week following the release of solid economic data; the 10-yr UST rose to 3.13% before settling at 3.06% by the end of the week, while the 2-yr rose to a high as 2.60% before falling back to 2.56% by week-end. Demand for the fresh UST supply will depend on whether or not investors will be attracted to higher yields or be nervous of a Fed that appears to be on track for at least two more rate hikes this year. Hence, the importance of the Fed minutes. Locally, market still expect the Bangko Sentral (BSP) to hike one more time this year, especially given strong indications of three more hikes by the Fed, a strong dollar, and sustained weakness of the peso. A relief rally followed the long-overdue hike by the BSP two weeks ago, but global uncertainty surrounding trade war noise further strengthened the dollar, and the expectation of more Fed hikes which may keep the peso under pressure for longer puts another BSP hike into focus. The BSP revised its 2018 average inflation estimate to 4.6% - well above the 2-4% target range and implies that inflation may average close to 5% for the rest of 2018, while 2019 inflation is estimated to be 3.4%. The country’s overall balance of payments (BOP) position in April 2018 posted a deficit of $270mn, a reversal from the $917mn surplus last April 2017. Outflows last month was mainly from payments made by the National Government (NG) for its maturing foreign exchange obligations and foreign exchange operations of the BSP, partially offset by income from the investments abroad and net foreign currency deposits of the NG during the month. Year-to-date, the BOPs stood at a deficit of $1.497bn compared to the $78mn deficit in the same period last year.

Market review. The local benchmark yield curve rose by 13bps week-on-week (WoW) on average and 78bps year-to-date (YTD). The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) widened to 368bps from 356bps last week as the former rose by 22bps to 6.74% (bid) and up by 105bps YTD, while the latter was up by 9bps WoW to 3.06%. Yields of ROPs rose by an average of 12bps, tracking USTs which rose by 5bps on average.

Total daily traded volume down 5% week-on-week (WoW) to Php8.7bn. The liquid yield curve fell by 26bps WoW. The front-end (FXTN 05-72: 1yr) fell by 1bp to 3.25%, the belly (FXTN 10-61: 9.7yrs) rose by 19bps to 6.45%, while the tail (R25-01: 20.5yr) spiked by 70bps to 7.22%. Secondary trading volume slightly dipped by 5% WoW to Php8.7bn as T-bond volume fell by 33% to Php4.0bn, offset by the 49% increase in T-bill volume to Php4.7bn. The auction for the 91-day and 182-day T-bills yesterday (May 21) were fully-awarded, while the 364-day was only partially awarded. Average bids for the 91-day and 182-day T-bills settled at 3.44% and 3.88%, respectively, lower than the previous auction and secondary market levels. The auction was 2.6x oversubscribed and the BTr raised Php13bn of the Php15bn it intended.

Emerging Markets’ (EM) 10-year yields up 25bps week-on-week (WoW). Yields of EM bonds we follow were up by 25bps WoW amid the UST surge. Korea (10-year yield -4bps), Pakistan (flat), and China (+1bps) outperformed last week, while Turkey (10-year yield +125bps), Hungary (+30bps), and South Africa (+28bps) underperformed.

USTs up 5bps WoW. US Treasuries rose by 5bps WoW on average, while the 10-yr UST ticked up 9bps WoW to 3.06% after rising to as high as 3.13% within the week ahead of $99bn in fresh UST supply this week and despite the higher-than-expected jobless claims data (222,000 versus 215,000 expected). Unemployment rate, however, stayed at the 17-year low of 3.9%. This followed the solid retail sales report (April: +0.3% QoQ, +4.7% YoY, within expectations). Trade talks with China are still far from resolution, but China agreed to buy more US goods to help narrow the US’ deficit, but there was no indication that it would hit the US’ target of $200bn.