Weekly Fixed Income Summary : September 24 – September 27, 2018
Written By Lloyd Brian Laurilla
Published on Oct 02, 2018
Reading time 4 mins
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BSP: Inflation to Have Peaked in September
Outlook. The Bangko Sentral ng Pilipinas (BSP) expects inflation to peak in September, hitting a high of 6.8% from 6.4% in August. On the other hand, the Department of Finance (DoF) expects inflation last month to have stayed at 6.4%, while analysts and economists of banking institutions expect at least 7.0%. The 10-yr local benchmark bid rate closed earlier at 7.6%, implying expectations of another 25-bp hike amid soaring inflation expectations. The BSP hiked rates by 50bps last week, bringing the total hikes this year by 150bps and the policy rate (RRP) to 4.5%. We expect bond yields to remain elevated this week as the market remains cautious of another breakaway inflation, which will be reported this Friday.
Budget Secretary Diokno indicated that economic targets for this year will most likely be kept during the October review, though he also said that the 7.0%-8.0% GDP target this year might be far-fetched. To hit 7.0%, the economy will have to grow by 7.7% in the second half.
Market review. The local benchmark yield curve rose by 36bps on average week-on-week (WoW) following the hikes of both Fed and BSP. The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) widened to 418bps from 383bps in the prior week as the former rose by 33bps to 7.23% (done) while the latter was down by 2bps WoW to 3.05%. Yields of ROPs were almost unchanged, down by 1bp on average, tracking the non-movement of the UST curve which was flat.
Average total daily traded up 16% week-on-week (WoW) to Php4.4bn. The liquid yield curve rose by an average of 38bps WoW as the front-end (364-day T-bill) fell by 11bps to 5.2%, the belly (FXTN 10-63: 9.5yrs) up by 46bps to 7.55%, while the tail (R25-01: 20.5yr) spiked by 56bps to 8.0%. Secondary trading average volume rose by 16% to Php4.4bn, still thin, as T-bond volume shed 29% to Php1.8bn. On the other hand, T-bill volume doubled to Php2.7bn. Last week, the 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. Lastly, the latest Php15bn auction of 91-day, 182-day, and 364-day T-bills was partially awarded as bids for the first paper were fully rejected. Accepted bids for the 182-day T-bill averaged 5.206% and 5.648% for the 364-day T-bill. Demand was relatively tepid as the auction was only 1.13x oversubscribed, with just Php9.2bn out of the Php15bn offered awarded.
Emerging Markets’ (EM) 10-year down 6bps (WoW). Yields of EM bonds we follow were down by 6bps WoW following a slew of hikes by the central banks of Indonesia (+25bps to 5.75%), the Philippines (+50bps to 4.5%), Czech Republic (+25bps), and Argentina (+500bps to 65%). Turkey (10-year yield -94bps), Brazil (-44bps), and Argentina (-42bps) outperformed last week, while the Philippines (10-year yield +33bps), Peru (+7bps), and Chile (+6bps) underperformed.
USTs flat WoW. US Treasuries were flat WoW on average as the 10-yr UST shed 2bps WoW to 3.05% following the Fed’s hike last week. The drop was largely attributed to Fed Chair Powell’s dovish comments on inflation following the meeting, saying that he doesn’t see inflation surprising on the upside. Market response was more on the Fed’s outlook rather than the meeting’s outcome, which was widely expected. The Fed indicated that they plan four more hikes by the end of 2019 and another in 2020 amid steady economic growth and a strong labor market. Fed officials view their stance as “accommodative”, staying the course of gradual hikes. Odds for a fourth hike in December is at 76.8%.