Bond yields decline on easing inflation

BORROWING costs in the Philippines declined in the second quarter of the year, bucking the regional trend of rising rates in reaction to the US Federal Reserve’s monetary policy tightening.

The Asian Development Bank (ADB) in a report this week said record levels of stability in consumer prices had helped keep government and private sector bond yields down.

ADB data showed yields for peso government bonds for tenors of two years and below fell between 15 basis points (bps) and 40 bps. Yields for tenors of between four and 20 years, with the exception of the seven-year maturity, fell between six and 30 bps.

“Yields fell amid easing inflation, giving room for the Bangko Sentral ng Pilipinas (BSP) to maintain its policy rates,” the ADB’s Asian Bond Monitor report said. The BSP, which uses inflation as the main measure for its policy decisions, kept its benchmark overnight borrowing and lending rates at 4 and 6 percent, respectively.

“Moreover, the decrease in yields was most notable at the shorter end of the curve as the market remained risk-averse in anticipation of an interest rate hike by the US Federal Reserve,” the BSP said.

Despite declining rates, ADB said the country was not immune to jitters caused by volatile market conditions.

Outstanding fixed-income instruments issued by the Philippine government and state-controlled companies declined 0.5 percent quarter on quarter to P3.896 trillion at end-June.

The volume of issuances also declined to P90 billion in the second quarter compared with P135 billion in the first quarter.

In terms of maturity profile, the National Treasury focused on the issuance of shorter tenors for Treasury bonds in the second quarter, with a three-year and five-year re-issue worth P25.0 billion and P22.4 billion, respectively, compared with a six-year and an 18-year issuance in first quarter.

Elsewhere in the region, borrowing costs rose as an improved US economic outlook could see the US Federal Reserve raise interest rates as early as September. The ADB did not discount the possibility that monetary authorities might take a more cautious approach given recent weakness in developing economies and falling oil prices.

Currency depreciation in the region could also pose a threat to Asian companies with large amounts of foreign currency denominated debt.

“Asian bond markets were buffeted by strong headwinds, including anticipation of the US Federal Reserve rate hike, which has led to an outflows of funds in some countries,” ADB chief economist Shang-Jin Wei said in a statement accompanying the report.