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Outlook. October inflation clocked in at 6.7%, unchanged from September and higher than the Department of Finance’s forecast of 6.5% but within the Bangko Sentral’s forecast range of 6.2%-7.0%. This brought the year-to-date (YTD) figure to 5.1% from 5.0%. Both BSP and DOF’s inflation outlook turned optimistic on stabilizing rice prices, power, and lower oil prices in the crude market (Brent prices down 8.7% MoM last October, up 8.90% YTD). However, the BSP indicated that one last hike is not completely off the table to seal the deal and anchor inflation expectations.

We expect bond yields to remain elevated ahead of a data-heavy week: the September trade balance is due on Wednesday, the October foreign reserves figure on Thursday, and third quarter GDP figure and the BSP’s November monetary board meeting on Thursday. The Fed is also due to meet on Friday (PH time) and is expected to stand pat. We expect market will be on wait-and-see mode.

Market review. The local benchmark yield curve fell by 9bps on average week-on-week (WoW) amid the shortened work week and mild correction continued. The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) slightly widened to 483bps from 459bps in the prior week as the former rose by 38bps to 8.04%% (done) while the latter likewise rose by 14bps to 3.22%. Yields of ROPs fell by 5bps on average, bucking the movement in US treasuries which rose by 9bps on average.

Average total daily down by 19% week-on-week (WoW) to Php8.0bn. The liquid yield curve fell by an average of 2bps WoW as the front-end (364-day T-bill) rose by 28bps 6.57%, the belly (FXTN 10-63: 9.5yrs) up by 38bps to 8.04%, while the tail (R25-01: 20.5yr) shed 46bps to 8.36%. Secondary trading average volume fell by 19% to Php8.0bn as average T-bond volume decreased by 45% to Php3.3bn. On the other hand, T-bill volume was up by 25% to Php4.7bn. The latest Php15bn auction of 91-day, 182-day, and 364-day T-bills was fully awarded with average rates of 5.077%, 6.233%, and 6.506% for the 91-day, 182-day and 364-day T-bill, respectively, all higher than the previous auction. The auction was 1.5x oversubscribed. Lastly, the Bureau of the Treasury (BTr) fully awarded its latest Php15bn auction of reissued 10-yr bonds (FXTN 10-63) at an average rate of 8.035%, higher than the secondary market rate. The auction was also 1.9x oversubcribed.

Emerging Markets’ (EM) 10-year up 2bps (WoW). Yields of EM bonds we follow were 2bps higher on average WoW ahead of the Fed’s meeting this week. Also, despite Bolsonaro’s win in Brazil’s presidential elections, the 10-yr Brazilian bond is down by 1bp to 4.76% as inflation outlook remains low at around 3%. Indonesia (10-year yield -35bps), Turkey (-23bps), and South Africa (-12bps) outperformed, while Argentina (10-year yield +107bps), Mexico (+46bps), and Pakistan (+13bps) underperformed.

USTs up 9bps WoW. US Treasuries were up by 9bps WoW on average as the 10-yr UST likewise increased by 14bps to 3.22%, on strong 3Q18 GDP data (up 3.5%) which further fueled Fed hike expectations and amid developing trade talks between Trump and Chinese president Xi Jinping. Markets were nervous as the US threatened to impose tariffs on all remaining Chinese imports worth $257bn. The US currently has tariffs on $250bn worth of Chinese goods. Sentiment lifted towards the end of the week as Trump tweeted that “discussion are moving along nicely”.The FOMC will meet again on Thursday (Friday, PH time) and is expected to stand pat but give a strong signal towards a 25-bp hike by year-end, bringing total hikes this year to 100bps and the Fed fund rate to 2.25%-2.50%. Odds for a hike in December stood at 76% from 70% last week, right on track of the Fed’s planned gradual tightening. As of the latest Fed minutes, three more hikes are on the table next year and another one in 2020.

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First Metro Weekly Fixed Income Summary

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