Yahoo Finance Philippine bonds set for deeper losses on aggressive rate hikes
By Karl Lester M. Yap
Philippine bonds looked poised to tumble further as the central bank ramps up its hawkishness to curb inflation and bolster a weakening currency.
Yields on benchmark 10-year sovereign notes may climb another percentage point by the end of the first quarter, according to Rizal Commercial Banking Corp. and financial consultancy firm eManagement for Business and Marketing Services. Surging yields have handed dollar-based investors in Philippine government debt a loss of 20% this year, the largest drop in Southeast Asia.
“It’s hard to be bullish on Philippine bonds in this environment,” said Michael Ricafort, chief economist at Rizal Commercial in Manila. “We have yet to see the peak in inflation and we expect the central bank to deliver more aggressive rate hikes in the months ahead.”
Higher bond yields raise the cost of funding for the Southeast Asian nation’s government, at a time when global recession risks are growing. The situation is being aggravated by factors including sticky US inflation, which will prompt more Federal Reserve rate hikes, Ricafort said.
The Philippine 10-year bond yield climbed as high as 7.56% this week, the most since November 2018. Yields have surged this month amid a global bond selloff and are up from 4.81% at the start of the year.
Bangko Sentral ng Pilipinas will refrain from buying government securities in the secondary market to preserve its credibility in targeting inflation, Governor Felipe Medalla said Tuesday. “The idea that the central bank will purchase bonds to prevent market rates from rising, we should say goodbye to that,” Medalla said.
Hawkish Turn
Investors were already on edge after the governor said earlier this week that authorities may unleash more than 100 basis points of cumulative rate increases in the last two policy meetings of the year. That would bring the total hikes this year to over 3.25 percentage points. The next rate decision is Nov. 17.
More tightening is on the cards to shore up a currency that’s plummeted some 13% this year, Medalla said.
The gloomy outlook also extends to Philippine dollar credit, where average corporate and quasi-sovereign bond spreads have widened the most in 16 years so far this month, according to data compiled by Bloomberg.
“Given the risk of inflation, bond investors should stay defensive by investing in shorter tenors and shortening their duration,” said Jonathan Ravelas, managing director at eMBM in Manila, and a former chief strategist at BDO Unibank Inc. “They should be prepared for greater volatility.”
Inflation will probably peak at 8% in December as a weaker peso increases imported prices, particularly the cost of oil, according to eMBM. Consumer-price gains quickened to 6.9% in September, poised to exceed the central bank’s annual target of 2% to 4%.
© 2022 Bloomberg L.P.
