Weekly Fixed Income Summary : September 3 – September 7, 2018

Bracing for Another 50-bp Hike

Outlook. Expectations of a hike by the Bangko Sentral ng Pilipinas (BSP) in its next monetary board meeting this month are rising as inflation and expectations are peaking. August inflation of 6.4% exceeded both BSP estimate of 5.9% and target range of 5.5%-6.2% and even analysts’ expectation of 6.0%. Year-to-date, inflation is at 4.8%. Following the report, BSP Governor Espenilla said that they intend to take strong immediate action. Likewise, there’s overwhelming consensus that the BSP will have to hike by another 50bps before the year ends, the only question left is the timing. There seems to be indication of a 50-bp hike in the next meeting that is evident in the secondary market as bid rate for the 10-yr hit as high as 7.47% yesterday (September 10). Even Espenilla warned that a meeting outside of the scheduled one could be an option. The argument to be made for this scenario is for the BSP to undercut inflation in one fell swoop as the next quarter is also a seasonally high-inflation period due to increased spending. However, some believe that we may have already seen the peak of inflation this year and expects inflation to decline for the rest of the quarter and ultimately taper off towards the end of the year due to high base effect last year.

Market review. The local benchmark yield curve rose by 43bps on average week-on-week (WoW) following runaway inflation. The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) widened by 22bps to 373bps from 351bps as the former rose by 30bps to 6.67% (done) while the latter rose by 8bps to 2.94%. Yields of ROPs rose by 1bp on average, tracking the movement of the UST curve which also increased by 6bps on average.

Average total daily traded down 25% week-on-week (WoW) to Php5.7bn. The liquid yield curve rose by an average of 39bps WoW as the front-end (364-day T-bill) rose by 4bps to 4.91%, the belly (FXTN 10-63: 9.7yrs) up by 30bps to 6.67%, while the tail (R25-01: 20.5yr) was likewise up by 13bps to 7.37%, as strong indications of a Fed hike this month compounded with BSP hike expectations. Secondary trading average volume fell by 25% to Php5.7bn as T-bond volume halved to Php2.4. On the other hand, average T-bill trading rose by 35% to Php3.3bn. The Bureau of the Treasury’s (BTr) latest Php15bn auction of 10-yr T-bond was fully rejected as submitted bids averaged 7.64%, 129bps higher than the previous auction and secondary market rates. The auction was also undersubscribed with total bids of just Php12.7bn. The Php15bn auction of T-bills was also 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 4bps (WoW). Yields of EM bonds we follow were up down by 4bps WoW following a confusing end of the week for EMs. Last Friday morning, a speaker for the US admin commented that it would hold off on its latest tariffs on $200bn worth of Chinese goods. However, this was immediately followed by Trump saying that another round of tariffs on $267bn worth of goods could follow. Turkey (10-year yield -201bps), Argentina (-68bps), and Korea (-5bps) outperformed last week, while the Philippines (10-year yield +30bps), Indonesia (+26bps), and Chile (+20bps) underperformed.

USTs up 6bps WoW. US Treasuries were up by 6bps WoW on average as the 10-yr UST rose by 8bps WoW to 2.94%. Progress, or lack thereof, on US trade policy weighed heavily on market sentiment last week. Trade talks between Canada and the US regarding a revised NAFTA agreement fell apart. Meanwhile, investors braced themselves for the implementation of new tariffs on $200bn worth of Chinese goods last Thursday, but a speaker for the adminstration abated anxiety with a statement that it will first evaluate public sentiment before making any further action. However, Trump quickly followed this up with another threat of new tariffs on $267bn worth of Chinese goods. Despite the peaking trade war, 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. Unemployment stayed at a low of 3.9%. Data seemed to bolster the argument for another rate hike soon, with odds for a hike this month at 99%.