Weekly Fixed Income Summary : May 21 – 25, 2018

Rally on Dovish Fed, Flush Liquidity

Outlook. We expect bond yields to trade sideways amid flush liquidity after the Bangko Sentral (BSP) cut the reserve requirement again by 1% to 18%, releasing an estimated Php90bn into the system. FXTN 05-72 also matured last week (Wednesday), adding another Php130bn. The cut was a move widely seen to keep domestic interest rates from unduly rising and making government debt borrowings more expensive. It is also supportive of the country’s growth objective of 7%-8%. Moreover, the Fed’s dovish tone from the latest Fed minutes released last week sent US Treasury (UST) yields lower by an average of 8bps week-on-week (WoW). There is still a concern about an overheating Philippine economy given the robust credit growth and faster inflation driven by higher gasoline/diesel and commodity prices, which is why another 25-bp hike this year is thought to be warranted.

Market review. The local benchmark yield curve fell by 19bps week-on-week (WoW) on average and up by 59bps year-to-date (YTD). The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) narrowed to 318bps from 368bps last week as the former fell to 6.11% (done) and up by 41bps YTD, while the latter was also down by 13bps WoW to 2.93%. Yields of ROPs fell by an average of 5bps, tracking USTs which likewise shed 8bps on average.

Average total daily traded volume up 30% week-on-week (WoW) to Php11.3bn. The liquid yield curve fell by an average of 23bps WoW. The front-end (364-day T-bill) fell by 14bps to 3.77%, the belly (FXTN 10-61: 9.7yrs) fell by 43bps to 6.02%, while the tail (R25-01: 20.5yr) stayed at 7.22%. Secondary trading volume recovered by 30% WoW to Php11.3bn as T-bond volume surged by 60% to Php6.4bn. On the other hand, T-bill volume was relatively flat at Php4.9bn, up by just 5% WoW. The BTr’s latest Php10bn auction of 10-yr bonds (10-63) was only partially-awarded despite having total tenders of Php13bn. Accepted bids averaged at 6.35%, 14bps higher than the previous auction of the same issue. Lastly, the latest Php15bn auction of 91-day, 182-day, and 364-day T-bills was fully-awarded amid healthy market appetite. Average accepted rates for the notes were 3.30%, 3.70%, and 4.198%, all lower than last auction’s rates. The auction was 2.5x oversubscribed.

Emerging Markets’ (EM) 10-year down 17bps week-on-week (WoW). Yields of EM bonds we follow were down by 17bps WoW on news of increased OPEC and Russian oil output of 1mn barrels per day. Turkey (10-year yield -40bps), Russia (-19bps), and South Africa (-18bps) outperformed last week, while Brazil (10-year yield +24bps), Peru (+14bps), and Czech Republic (+10bps) underperformed.

USTs down 8bps WoW. US Treasuries down by 8bps WoW on average, while the 10-yr UST shed 13bps WoW to 2.93% on a more dovish Fed tone from last week’s minutes release, helped by growing demand for safe-haven assets amid geopolitical uncertainty (trade fears, Trump’s decision to cancel the upcoming summit with North Korea). Federal Reserve officials gave no indication that they are likely to speed up their pace of interest rate increases, suggesting instead that they would be willing to allow the inflation rate to overshoot the 2% target for a “temporary period,” while the economy continues to expand. The minutes also showed that officials are less concerned about an overshooting inflation versus target than inflation dipping again. Officials continue to see the economy as strong, but they remain worried about global trade tensions, including potential damage from American and Chinese tariffs and the possibility that uncertainty over trade policy could already be crimping business investment in the United States. Trade talks with China are still far from resolution, but China agreed to buy more US goods to help narrow the US deficit by $200bn.