Investors told to position for steeper bond yield curve
Reuters
First Posted 15:17:00 08/27/2008
Filed Under: Emerging Markets Debt, Government Debt, bonds and t-bills
SINGAPORE -- Investors should position for a steeper Philippine bond yield curve as heightened inflation risks and a weaker currency prod the central bank to tighten policy further, analysts at DBS Bank said.
"Given the rapid weakening of the peso at a time when inflation is soaring suggests there are substantial rate hike risks. Yes, this is despite slowing GDP (gross domestic product) growth," the analysts said in a note.
"We expect two- and 10-year government bond yields to rise by 200-300 basis points before the yearend," they said.
That would push up the spread between two- and 10-year government bonds to 150 basis points from just under 100 basis points currently as the yield curve steepens, they said.
Bond yields in many Asian countries have eased in recent weeks after rising sharply earlier this year amid concern about inflation, worsening government budget positions and weakening currencies, the analysts said.
"We think that Philippine government bonds, despite the sell-off since January, are still overpriced," said the analysts.
Yields on 10-year Philippine government bonds jumped by four percentage points from January to July to more than 10 percent when inflation hit a near 17-year high of 12.2 percent.
Yields have eased since July to around 8.0 percent.
The central bank, which raised policy rates by 75 basis points since June, is widely expected to raise rates again by 25 basis points on Thursday to curb inflation.
Philippine bonds appear overpriced compared with Indonesia, where economic fundamentals look rosier, the DBS analysts said. Indonesia's 10-year bonds yield 12 percent with annual inflation at 11.9 percent in July.
Also, the Philippine central bank was likely to raise rates more aggressively than its counterpart in Indonesia, meaning Philippine bonds were prone to selling pressure, they said.
Meanwhile, the Philippine peso's poor performance might dampen investors' interest in local bonds, they added.
The peso, one of the worst performing currencies in Asia, has lost about 10 percent against the dollar so far this year due to the fallout from high oil prices and capital outflows.
The Indonesian rupiah by contrast, has gained almost 2.5 percent against a broadly firmer dollar this year.
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