Weekly Fixed Income Summary : November 19 – November 23, 2018

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Hike Pause

Outlook. We believe that the BSP is done hiking for the year especially with the Fed’s recent dovish tone and the expected easing of local inflation for the rest of the year and in 2019.The central bank’s most recent 25bps last week brought the policy rate (RRP) to 4.75% and the total hike to 175bps this year and was a move that was widely expected. The hike was deemed a proactive move to temper inflation as the bank is wary of supply-side and possible wage pressures which could continue to drive prices upwards, though inflation is believed to have peaked already as rice prices (regular milled) have gone down by as much as 4%-6% from its peak in September and global oil prices continue to slide downwards (Brent: -30% to $61/bbl, WTI: -33% to $50/bbl from peak last October). The decline in oil prices, however, could be a double-edged sword: government is now rethinking the suspension of oil excise taxes next year. We expect rice prices will continue to go down as the price cap in NCR (range between Php35-47/kg, depending on quality, enacted in the first week of November) takes into effect. Price caps in the provinces is also being studied.

Furthermore,certain trust accounts for special institutions with defined purposes (called Specialized Institutional Accounts under Trust (SIT)) may soon be exempt from bank reserve requirements. Though this may not necessarily have a large impact on bank liquidity, this move may provide a hint that the BSP is warm to the idea of further reducing the reserve requirements next year if inflation eases back towards the 2%-4% range.

Market review. The local benchmark yield curve fell by 2bps on average week-on-week (WoW) as dovish sentiment continue to flood the market. The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) narrowed to 410bps from 426bps in the prior week as the former fell by 20bps to 7.15% while the latter likewise fell by 3bps to 3.05%. Yields of ROPs fell by 8bps on average, while US Treasuries were unchanged on average.

Average total daily up by 58% week-on-week (WoW) to Php11.4bn. The liquid yield curve fell by an average of 2bps WoW as the front-end (364-day T-bill) rose by 4bps to 6.57%, the belly (FXTN 10-63: 9.5yrs) down by 20bps to 7.15%, while the tail (R25-01: 20.5yr) shed 50bps to 7.65%. Secondary trading average volume rose by 58% to Php11.4bn as average T-bond volume soubled to Php8.7bn. On the other hand, T-bill volume dipped by 13% to Php2.7bn. The latest Php15bn auction of 91-day, 182-day, and 364-day T-bills was partially awarded as bids for the 91-day bill were rejected. Bids for the 182-day and 364-day bills averaged 6.294% and 6.550%, ibp and 2bps higher, respectively. The auction was 1.95x oversubscribed. Lastly, the Bureau of the Treasury (BTr) fully awarded Php15bn worth of 7-yr T-bonds at an average rate of 6.974%, lower than the secondary market rate. The auction was more than 4x oversubscribed, prompting the Treasury to offer a tap facility window of another Php15bn of the bond.

Emerging Markets’ (EM) 10-year down 1bp (WoW). Yields of EM bonds we follow were down by 7bps on average WoW on dovish Fed sentiment. Peru (10-year yield -1bp), the Philippines (-5bps), and Peru (flat) outperformed, while Turkey (10-year yield +36bps), Indonesia (+6bps), and Brazil (+6bps) underperformed.

USTs flat WoW. US Treasuries were unchanged on average WoW on average though the US 10-yr shed 3bps to 3.05% on a new dovish Fed tone. Fed chair Powell cautioned on slower global growth following Germany’s unexpected slowdown in the third quarter by 0.2%, the first drop since 2015, which led to the lowering of growth forecast this year to 1.6% from 2.3%. Growth in the US is also expected to wane next year as the effects of corporate tax cuts enacted this year wear off and as the US economy feels the lagged effects of the last few Fed hikes. His tone was a sharp contrast from the Fed’s tone last October when the market expected it to confidently continue its planned gradual hikes throughout 2019. In fact, odds for December rate hike have been steadily dropping from a high of 88% prior to Powell’s comments to 65% recently.

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