Weekly Fixed Income Summary : September 17 – September 21, 2018
Written By Lloyd Brian Laurilla
Published on Sep 26, 2018
Reading time 3 mins
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Typhoon Lifts Inflation
Outlook. There’s upward pressure on the yield curve, significant ahead of expected rate hikes by both the Bangko Sentral’s (BSP) on Thursday and the Fed on Wednesday-Thursday (PH time Thu-Fri). The former in response to 7% inflation forecasts by various institutions for the month due to the typhoon devastation: half a million tons of rice lost worth Php11bn; Brent oil breaching $80/bbl last week; a weaker peso, now down by as much as 7% year-to-date.
Government’s counter inflation measures like sugar and rice importation will have lagged effects and so inflation won’t likely peak this quarter also the BSP assured higher inflation will only be transitory.
The market seems to be pricing in a 50-bp hike this Thursday as the latest auction of 7-yr bonds fetched an average accepted rate of 7.085%, 22bps higher than the secondary market rate, which also already rose by 13bps in the week prior.
Market review. The local benchmark yield curve was flat on average week-on-week (WoW) as the market was cautious ahead of both BSP and Fed hikes this week. The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) narrowed to 383bps from 457bps in the prior week as the former rose fell by 65bps to 6.90% (done) while the latter was up by 8bps WoW to 3.07%. Yields of ROPs rose by 4bps on average, tracking the movement of the UST curve which rose by 5bps on average.
Average total daily traded down 46% week-on-week (WoW) to Php3.8bn. The liquid yield curve rose by an average of 5bps WoW as the front-end (364-day T-bill) rose by 21bps to 5.4%, the belly (FXTN 10-63: 9.5yrs) down by 47bps to 7.09%, while the tail (R25-01: 20.5yr) shed 15bps to 7.44%. Secondary trading average volume fell by 46% to Php3.8bn as T-bond volume shed 43% to Php2.5bn. T-bill volume also halved to Php1.4bn. Yesterday’s Php15bn auction of T-bills was fully rejected as bids came in higher than expected on light demand. Average bid rates for the 91-day, 182-day, 364-day T-bills averaged 4.381%, 5.142%, and 5.643%, respectively, while bid-to-cover was only 1.1x. On the other hand, the latest Php15bn auction of 7-yr bonds was partially awarded with average bids averaging at 7.085%. The auction was 1.75x oversubscribed but only Php5.7bn was awarded.
Emerging Markets’ (EM) 10-year down 7bps (WoW). Yields of EM bonds we follow were down by 7bps WoW led by Brazil, down 40bps WoW, as its central bank held rates steady at 6.5% ahead of its election in October 7. Tightening is expected to begin until then as inflation is expected to trend higher. The Philippines (10-year yield -65bps) and Indonesia (-27bps) outperformed last week, while Turkey (10-year yield +28bps), Korea (+10bps), and Singapore (+9bps) underperformed.
USTs up 5bps WoW. US Treasuries were up by 5bps WoW on average as the 10-yr UST likewise increased by 8bps WoW to 3.07% in anticipation of this week’s Fed hike. Meanwhile, Trump delivered on his promise of a 10% tariff on $200bn of Chinese goods which will escalate to 25% in January 2019. Chinese officials indicated that they won’t allow the yuan to devalue any further, which is already down by 8% against the dollar, making Chinese goods more competitive in the global markets and softening the impact of the new tariffs.
On the data front, weekly jobless claims fell by 3,000 to 201,000, the lowest level in half a decade and bucked analyst expectations of a rise to 210,000. on the flip side, US manufacturing PMI fell to 54.7 last August from 55.3 in July. This was a 9-month low.