One More BSP Hike?
Outlook. Hawkish signals from the Bangko Sentral ng Pilipinas (BSP) add upward pressure on bond yields that are already at decade highs. After returning from a five-week leave last week, BSP Governor Espenilla hinted that the next monetary board meeting will determine whether there’s a need for a final hike before the end of the year to “seal the deal and firmly anchor inflation expectations”. This came as a mild surprise as the last 50-bp hike in September was believed to have been the last for the year after a total hike of 150bp year-to-date (YTD) and as inflation was expected to have peaked in the third quarter. Food prices, especially rice, are expected to taper off as rice imports enter the market. Base effect was also expected as inflation started to gradually rise in the fourth quarter last year.
The US is reportedly preparing tariffs on all remaining Chinese imports worth $257bn, which would include tech products, if trade talks between Trump and Xi Jinping falls through and could be imposed as early as December. Needless to say, we expect the market to remain cautious and keep bond yields elevated.
Market review. The local benchmark yield curve fell by 3bps on average week-on-week (WoW) on mild correction from decade-high levels of bond yields. The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) slightly narrowed to 459bps from 485bps in the prior week as the former fell by 38bps to 7.67%% (done) while the latter likewise shed 12bps to 3.08%. Yields of ROPs fell by 5bps on average, tracking the movement in US treasuries which likewise decreased by 7bps on average.
Average total daily traded up 25% week-on-week (WoW) to Php9.8bn. The liquid yield curve fell by an average of 27bps WoW as the front-end (364-day T-bill) rose by 4bps to 6.30%, the belly (FXTN 10-63: 9.5yrs) down by 35bps to 7.60%, while the tail (R25-01: 20.5yr) shed 30bps to 8.63%. Secondary trading average volume rose by 25% to Php9.8bn, still very thin, as average T-bond volume recovered by 44% to Php6.1bn. On the other hand, T-bill volume was flat at Php3.7bn, up by just 3%. The latest Php15bn auction of 91-day, 182-day, and 364-day T-bills was fully awarded with average rates of 4.979%, 6.159%, and 6.410% for the 91-day, 182-day and 364-day T-bill, respectively. The 91-day and 182-day rates were 2bps and 10bps higher, respectively, than the previous auction while the 364-day was 8bps lower. The auction was 1.8x oversubscribed. Lastly, the Bureau of the Treasury (BTr) fully rejected all tenders for the reissued 7-yr bond as bid rates averaged 8.284%, higher than the previous auction’s rate of 7.085%. The auction was also 1.6x oversubcribed.
Emerging Markets’ (EM) 10-year down 1bp (WoW). Yields of EM bonds we follow were barely changed WoW, down just 1bp, amid the threat of new tariffs on Chinese imports by the US. Turkey (10-year yield -11bps), Brazil (-5bps), and Chile (-5bps) outperformed, while Mexico (10-year yield: flat), the Philippines (+5bps), and Indonesia (+9bps) underperformed.
USTs down 7bps WoW. US Treasuries were down by 7bps WoW on average as the 10-yr UST shed 12bps to 3.08%, on mixed US economic data. The US economy grew at an annual pace of 3.5% in the third quarter, slightly better than consensus expectation of 3.4% but slower than the 4.2% growth in the second quarter. The growth was driven by consumer spending, which is two-thirds of the US economy and grew at a rate of 4% in the same period. A glaring red flag in the report showed a sharp slowdown in business capital expenditure, down by 7.9% and the biggest decline since 2016. The personal consumption expenditure index (PCE), the Fed’s preferred measure of inflation, only increased by 1.6% last quarter, much lower than the 2.2% expected increase by economists and lower than the Fed’s target of 2%. Odds of a December Fed hike remained high at 70% but fell from its high of 84% two weeks ago.
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