PH bond yields rise as inflation steps up

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Investors shun long-term risk

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Bond yields in the Philippines and China trended higher in the weeks from March 1 to May 15, in contrast to declines in most emerging East Asian markets, the Asian Development Bank (ADB) said in a report.

Accelerating inflation and higher volumes of Treasury bond issues were behind the rise in Philippine bond yields, it said.

“Between 1 March and 15 May, yields for both 2-year and 10-year bonds declined across emerging East Asia, except in the People’s Republic of China (PRC) and the Philippines,” ADB said in the latest Asia Bond Monitor report released on Friday.

“In the Philippines, yields were driven higher by rising inflation and significant retail Treasury bond issuance,” it pointed out.

Biggest rise in 10-yr bond yields

The publication noted that between March 1 and May 15, local currency government bond yields in the Philippines rose for all tenors, except the shorter-term 3-month maturities, with yields down by 24 bps; 6-month maturities, with yields down 9 bps; and 4-year maturities, with yields down 17 bps.

Yields increased for government bonds with 1-, 2-, 3-, 5-, 7-, 10-, and 20-year maturities, with the largest increase seen in the yield for 10-year bonds, up 65 bps.

The yield spread between 2-year and 10-year tenors widened by 26 bps during the review period, the ADB report added.

“Demand for shorter-dated securities was strong because the market was in a wait-and-see position. Investors will not risk locking up their funds in long-term maturities as they remain on the lookout for policy leads on both the local and external fronts,” the ADB report explained.

“Strong demand has bid up bond prices at the short-end, resulting in lower yields. On the other hand,
advancing yields for most tenors reflect the general perception that interest rates will rise amid expectations of accelerating in ation and hawkish moves by the Bangko Sentral ng Pilipinas (BSP) toward the second half of the year,” it explained.

During the review period, consumer prices in the Philippines rose 3.4 percent year-on-year in April, the same pace of inflation from the previous month, the report noted.

“Inflation has been trending upward since November 2016, reaching its highest level in more than two years in March. Year-to-date through April, the average inflation rate was 3.2 percent y-o-y, which was within the government’s target range of 2 percent to 4 percent for full-year 2017,” it said.

Meanwhile, the publication also reported that the Philippines’ LCY bond market had outstanding bonds at the end of March amounting to P4.94 trillion ($98 billion), an increase of 1.5 percent quarter-on-quarter and 5.0 percent year-on-year.

“The increase in the bond stock was supported by gains in both the LCY government and corporate bond segments. At the end of March, government bonds comprised 81.1 percent of total LCY bonds outstanding and corporate bonds comprised 18.9 percent,” it said.

China up, most emerging market yields down

For China, yields for both 2-year and 10-year yields rose as the authorities raised interest rates on reverse repurchase agreements and lending facilities, and pushed through measures to foster deleveraging.

In particular, the report said Indonesia experienced the largest drop of 49 basis points (bps) in its 10-year yield due to positive investor sentiment and an expected credit rating upgrade from Standard & Poor’s Global Ratings. S&P is the only rating agency that had placed Indonesia below investment grade.

In the Republic of Korea, where domestic political uncertainties are receding in the aftermath of a presidential election on May 9 that produced a clear-cut winner, the 10-year yield rose but the two-year yield fell.

In Singapore, the 10-year yield fell but the two-year yield rose marginally. In Thailand, the two-year yield fell slightly while the 10-year yield rose marginally, it added.

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