Gov’t bond rally seen in 1st half of 2015

MANILA, Philippines–Local government bonds may have a good run-up in the first half of 2015 as the downturn in inflation rate is seen keeping interest rates low, a joint macroeconomic research by First Metro Investment Corp. (FMIC) and University of Asia & the Pacific (UA&P) said.

“Given the weakness in the economies of the Eurozone and Japan, and the slowing down of China, the outlook for the domestic bond market for 2015 looks good,” FMIC and UA&P said in the December issue of their joint publication, “The Market Call.”

Despite strong numbers tracking the US economy, the research said 10-year US treasury bonds yielded a mere 2.2 percent by the end of November and were still trending downward. “This means zero to negative pressure on domestic bond yields,” the research said.

“With the government going for $1.75-billion bond issue abroad in January 2015, and local inflation likely to fall below 3 percent by January and stay close to that level in the first half of 2015, we expect a good government securities (GS) bond rally in first half. A likely neutral stance in monetary policy should support this,” the research said.

The government’s plan to tap the offshore bond market means it will not crowd out local borrowings, thereby easing pressures on interest rates. On the other hand, when inflation rate is low and economic growth is muted, the inflation-targeting central bank is not under pressure to mop up excess liquidity that could free up too much money to chase too few goods.

With muted movements expected until the end of the year, the market is now looking at 2015 as a “return to good times,” the research noted.

Collapsing crude oil prices, sharply falling inflation rates and softer long-term US treasury bond yields already boosted the market for GS in November, the research said.

“These translated into the flattening of the yield curve driven by lower yields for longer tenors,” the research said.

The yield curve, which plots the yield to maturities and the respective maturity dates of benchmark fixed-income securities, is a measure of the market’s expectations of future interest rates given the current market conditions.

A flattening yield curve signals that short-term interest rates will rise and long-term interest rates will fall. It is during this time that investors would typically veer toward fixed-income securities with the highest credit quality.

The FMIC-UA&P research added that recent developments had provided the impetus for a more robust secondary market trading activity. The volume does not include participation in the secondary market trading by tax-exempt institutions which the Bureau of the Treasury has postponed to Jan. 5, 2015.

“Secondary trading in corporate bonds, on one hand, failed to mirror the robust activity in the GS market as the supply of new bonds came in trickles,” it said.

In the meantime, the research said corporate bond issues—many of which have been delayed in the fourth quarter of 2014 due to regulatory requirements—should regain the momentum for the entire year. This was as firms were seen to take advantage of lower interest rates, even as they face single-borrower’s limits in their bank financing, the research noted.

For offshore Philippine government cash bonds or ROPs, the research said these would likely track movements in US Treasuries of similar tenor, or at least at the longer end of the curve, citing the US dollar’s continued appreciation.

Overall, the Southeast Asian region was seen to benefit from the fall in crude oil prices and currency depreciation alongside the US dollar strengthening.–Doris C. Dumlao