Outlook. We expect upward pressure on bond yields to persist this week following the Bangko Sentral’s (BSP) rate hike last week, the second this year which brought the policy rate to 3.5%. Consensus before the monetary board meeting was that the BSP will stand pat (but another hike sometime within the year was expected), although there was already a growing sense of urgency after the meeting was rescheduled a day earlier following the Fed’s second hike of the year last May. We expect the move to temper the peso’s continued hemorrhage this year, which touched a 12-year low at Php53.50 last June 18. The peso improved by 0.3% to php53.29 after the hike by week’s close. Standard & Poor (S&P) and Fitch’s BMI Research expect another 25-bp hike to 3.75% within the year to curb inflation and ease pressure on the peso.
Market review. The local benchmark yield curve rose by 27bps week-on-week (WoW) on average and up by 104bps year-to-date (YTD). The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) widened to 401bps last week from 330bps as the former rose by 71bps to 6.91% (bid) and up by 121bps YTD, while the latter was down by 3bps WoW to 2.90%. Yields of ROPs rose by an average of 2bps, bucking the trend in USTs which shed 1bp on average.
Average total daily traded volume down 51% week-on-week (WoW) to Php4.4bn. The liquid yield curve rose by an average of 18bps WoW. The front-end (364-day T-bill) rose by 2bps to 4.31%, the belly (FXTN 10-61: 9.7yrs) rose by 52bps to 6.64%, while the tail (R25-01: 20.5yr) rose by 10bps to 7.32%. Secondary trading average volume was down by 51% WoW to Php4.4bn as T-bill volume decreased by 64% to Php1.5bn and T-bond average volume fell by 39% to Php2.8bn. The Bureau of the Treasury’s (BTr) latest Php10bn auction of reissued 20-yr T-bond was only partially-awarded despite being 1.4x oversubscribed. Accepted bids averaged at 6.979% and were capped at 7.0%. The bureau awarded Php4.1bn of the Php10bn. Lastly, the latest Php15bn auction of 91-day, 182-day, and 364-day T-bills was only partially-awarded despite being 1.5x oversubscribed. The 91-day was fully-rejected, the 364-day only partially-accepted, while only the 192-day was fully-accepted. Accepted rates for the 182-day averaged 3.766%, while the 364-day was capped at 4.357%.
Emerging Markets’ (EM) 10-year down 8bps week-on-week (WoW). Yields of EM bonds we follow were down by 8bps WoW amid a broad-based dollar rally which waned by the end of the week on renewed trade tensions. Mexico (10-year yield -28bps), South Africa (-14bps), and Poland (-7bps) outperformed last week, while Czech (10-year yield +10bps), Israel (+10bps), and Hungary (+9bps) underperformed.
USTs down 1bp WoW. US Treasuries were unchanged, down by just 1bp WoW on average, while the 10-yr UST shed 4bps WoW to 2.89%. Trade tensions between the US and China was renewed following Trump’s instruction to draw up another $200bn in additional tariffs on Chinese goods, to which a Chinese commerce ministry official warned that they will respond in kind. Later in the week, Trump further exacerbated trade jitters when he warned that the US will place a 20% tariff on EU auto imports if the long-standing 10% tariff on US car imports to the EU is not taken down. Meanwhile, US home sales fell by 0.4% in May amid declining inventories and a shortage of properties. US jobless claims clocked in at 218,000 versus 220,000 and unemployment at an 18-year low of 3.8%, showing a tight labor market and nearing the Fed’s target of 3.6%.