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10 Years Firm Even with Dovish BSP

Outlook. After the lower August inflation of 1.7%, a beat versus the 1.8% consensus bet, the market proved unencouraged, looking a bit scared instead and on a selldown mode in the GS market. As some big investors took profit and kept the ten year rate firm at 4.58% (higher today at 4.67%), that event seemed to have cultivated an alternative view that interest rates may have troughed. Also, there is some worry the BSP won’t proceed with a rate cut late this month and the likely consideration is that doing so may aggravate the current account deficit that just came out at $3.4bn for the month of July and $22.2bn, year-to-date, though a bit lower than last year’s $23.2bn, same period. Low interest rates tend to fuel demand for imported products.

Stable Peso. The peso though remained stable on the dollar, just reverting back to Php52.015 in today’s close from last week’s low of Php51.80. Behind it was the healthy and actually at peak level gross international reserves (GIR) which rose to $85.6bn in August 2019 from $85.18bn of the previous month, reflecting the National Government’s net foreign currency deposits and Bangko Sentral ng Pilipinas’ (BSP) income from foreign investments.

Tentative. Market’s tentative mood is testing government’s resolve to keep rates low as seen in today’s Php20bn 7-yr government bond auction that saw only half of it sold on tenders of Php22bn and fetching the top end or 4.503% of the forecast rate range of 4.35% to 4.5%. Had government sold all, the done rate would have been higher at 4.569% but still lower than the actual done rate of 4.8% when the bond was sold last July 16, 2019.

Upward instead of Downward. The local 10 year government bond rate last week rose by 12 bps to 4.58%. This was in spite of the BSP’s guidance of a lower 2% inflation in the third quarter that likely creates scope for another 25 bps rate cut in policy rate come the next Monetary Board meeting on September 26.

The BSP’s tone was in sync with the latest moves of some big central banks, a nascent QE2 but unlabelled as such. The ECB sounded more dovish due to the growing Brexit confusion and it likely fallout on Europe as a whole. Manufacturing data in Europe are also showing growing wekaness. In the US, the Fed is sure to cut by 25 bps to 1.75% next Thursday according to Fed Funds futures, the same bet of JP Morgan and Bank of America Merrill Lynch.

The People’s Bank of China’s 50 bps rate cut to 13% was widely thought to be inadequate to shore up it economy with its incremental liquidity of $126.3bn out into the system. Other countries which have slashed their benchmark rates were Hong Kong (by 25 bps), Thailand (by 25 bps), India (by 35 bps), and New Zealand (by 50 bps).

US Treasuries and Local 10 yrs Bond. The local benchmark yield curve and US Treasuries (UST) both rose 6 bps and 1 bps on average week-on-week (WoW), respectively. Also the 10 year UST was higher by 5 bps to 1.55% due to the central banks’ selldown of US Treasuries. Year-to-date, the peso ten year government bond was down by 276 bps. Week on-week, the front-end (364-day T-bill) was steady, (down by 1 bp to 3.68%); the belly (FXTN 10-63:9.5yrs) was up by 12 bps to 4.58%, while the tail (R25-01:20.5yr) rose by 15 bps to 4.97%. Secondary trading average volume was down 40.5% to Php13.56bn, while T-bill volume down 36.7% to Php2.95bn.

Liquidity Indicators: Still Tight as Loan and M3 still slow-moving. There is much room for domestic liquidity to improve with the (M3) growth of just 6.7% in July year-on-year, slightly faster than the 6.4% in June. M2 also grew by 5.2% in July from 5.1% of the previous month. This is in sync with the slower loan demand growth, net of reverse repurchase, up by 11.1% in July 2019 from 10.5% in the previous month. As per gross RRP, outstanding loans rose 10.7% in July from 10.5% in June.

Read full article here.

First Metro Weekly Fixed Income Summary

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