Weekly Fixed Income Summary : September 10 – September 14, 2018

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Rate Hikes Ahead

Outlook. Indications in the bid rates of the Bureau of the Treasury’s (BTr) auctions and in the secondary market show that the market is already pricing in a 50-bp hike next week. The latest 10-yr auction, which was fully-rejected, had an average bid rate of 7.64%, almost a full percentage point higher than the last done rate of 6.725%. Furthermore, BSP Governor Espenilla recent statement that the bank will take “strong monetary action” amid rising inflation and uncertainty over impact of recent Typhoon Mangkhut on local prices of goods. An estimated 250,730 metric tons of rice worth Php5bn was lost to the typhoon. He noted that the impact of the typhoon is expected to be localised and transitory – thus unlikely long-term, but the monetary board is looking for “strong immediate action” in response to other supply factors that have caused August inflation to a decade-high and YTD inflation to 4.8%, way above the BSP’s target range. There is significant upside pressure on the yield curve and, as such, we expect it to rise.

In the local data front, the balance of payments (BoP) slipped to a deficit of $2bn in 2Q18 from surpluses of $1.2bn and $289mn in 1Q18 and 2Q17, respectively, and bringing the YTD amount to a deficit of $800mn. The current account (CA) deficit widened further by $2.9bn in the past quarter, bringing YTD total deficit to $3.1bn, already equivalent to the BSP’s target for the entire year. The peso, as a result, slipped to a 13-yr low of Php54.13 to the dollar last week, another reason why a 50-bp hike or a total of 75bps by the end of the first half of 2019 is widely expected. On the plus side, remittances last July rose by 1.9% MoM and 5.2% YoY to US$2.40bn, broadly in line with consensus’ expectations of 5.1% YoY. Year-to-date, cash remittances are up by 3.0% to $16.6bn. The peso’s general weakness could be a boon to what seemed like slowing remittance inflows as remittance growth in peso terms (~7.6% YoY) still outpaced CPI (4.8% YTD).

Market review. The local benchmark yield curve rose by 28bps on average week-on-week (WoW) as markets price in hikes of both BSP and Fed this month. The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) widened to 457bps, the widest gap this year, from 373bps last week as the former rose by 88bps to 7.56% (bid) while the latter was up by 5bps WoW to 2.99%. We note that the last done rate for the 10-yr 10-63 was 6.725%. Yields of ROPs fell by 2bps on average, bucking the movement of the UST curve which rose by 5bps on average.

Average total daily traded up 23% week-on-week (WoW) to Php7.7bn. The liquid yield curve rose by an average of 24bps WoW as the front-end (364-day T-bill) rose by 49bps to 5.4%, the belly (FXTN 10-61: 9.7yrs) up by 88bps to 7.56%, while the tail (R25-01: 20.5yr) was up by 22bps to 7.60%. Secondary trading average volume rose by 23% to Php7.7bn as T-bond volume recovered by 80% to Php4.3bn. On the other hand, T-bill volume shed 18% to Php2.7bn. Last week’s Php15bn auction of T-bills was just partially awarded as all bids came in below secondary market rates. Bids for the 91-day T-bill were all rejected as bid rates averaged 3.549%. On the other hand, both 182-day and 364-day T-bills were fully awarded at average rates of 4.353% and 5.137%, respectively. The auction was 1.46x oversubscribed.

Emerging Markets’ (EM) 10-year down 8bps (WoW). Yields of EM bonds we follow were down by 8bps WoW led by Turkey as the country’s central bank raised rates by 625bps last week, 300bps more than expected. Turkey (10-year yield -84bps), Malaysia (-7bps), and Mexico (-6bps) outperformed last week, while the Philippines (10-year yield +88bps), Brazil (+30bps), and Hong Kong (+14bps) underperformed.

USTs up 5bps WoW. US Treasuries were up by 5bps WoW on average, while the 10-yr UST likewise increased by 5bps WoW to 2.99%, on mixed trade policy outlook. The week started with the market jittery with the planned tariff raising on $200bn of Chinese goods from 10% next week to 25% in January 2019, but Treasury Secretary Mnuchin helped ease tensions as he led a new round of trade negotiations with China. On the data front, August US CPI data eased to 2.7%, lower than the 2.8% expected and July’s 2.9%. This came on the heels of news that the US economy added more jobs than expected last August at 201,000 versus 191,000 expected. Hourly wage growth likewise exceeded expectations at 2.9% vs 2.7% expected. This was the highest mark since 2009. However, in real terms -- adjusted for inflation -- the growth was just barely over 1.0%. Unemployment stayed at a low of 3.9%.

Former Fed Chair Yellen opined last week that “the central bank should consider deliberately courting an economic boom to make up for a bust by promising to keep interest rates “lower-for-longer” after they are cut to zero”, a sentiment echoed by regional Federal Reserve Bank Presidents James Bullard and Raphael Bostic. Despite these dovish statements, odds for a rate hike in the Fed’s next meeting this September 25-26 was unmoved at 99%. Read full article here.