MANILA, Philippines–Easing inflation and a credit rating upgrade helped bring down borrowing rates for Philippine bonds, the Asian Development Bank (ADB) said Wednesday.
In its Asia Bond Monitor report for June 2019, the ADB noted that yields of all tenors of Philippine local currency bonds dropped by an average of 31 basis points (bps) between March 1 and May 8.
The biggest decline in yield was recorded in 20-year bonds, as the annual rate slipped by 66 bps.
Bond rates fell even as yields for short-dated securities rose—in the case of the benchmark 91-day treasury bills, by 6 bps.
“Toward the end of March through May, there were growing global concerns over a possible recession in the United States due to the inversion of its yield curve for the first time since 2007. Investors viewed this as a possible sign of slowing global growth. Given these expectations, investors preferred to buy bonds in the belly of the curve,” the ADB said.
Also, the ADB attributed the declining bond rates to market expectations of lower headline inflation this year “due to an expected decline in global oil prices and as monetary and non-monetary policies designed to rein in inflation took effect.”
The rate of increase in prices of basic commodities averaged 3.6 percent during the first five months, already within the government’s 3-4 percent target range.
“Interest rate cuts from the Bangko Sentral ng Pilipinas (BSP), as well as the new BSP governor’s hinting at expediting a cut to large banks’ reserve requirement ratio [RRR] this year, emboldened investors to take more risks,” the Manila-based multilateral lender said, referring to Governor Benjamin E. Diokno, who took over as BSP chief in March following the death of former governor Nestor A. Espenilla Jr.
In May, the BSP’s policy-setting Monetary Board cut the policy rate by 25 basis points to 4.5 percent amid slowing inflation rate as well as economic growth.
The BSP was also implementing three tranches of reduction in the RRR of universal, thrift and rural banks between May and July to boost liquidity in the market.
“Yields also declined as Standard & Poor’s (S&P) announced an upgrade in the credit rating of the Philippines” in April, the ADB added.
S&P raised its long-term credit rating for the Philippines to BBB+, two notches above minimum investment grade.
Credit ratings are a measure of a government’s creditworthiness. As the stability of state finances is also related to a country’s performance, credit scores serve as a proxy grade for the economy.
Improved ratings would allow the government to demand lower rates when it borrows from lenders, which could translate to lower interest rates for consumers and businesses borrowing from banks using government-issued debt paper as benchmarks for their loans.
The Philippines current enjoys investment-grade credit ratings from the top three debt watchers, namely Moody’s Investors Service, Fitch Ratings and S&P Global Ratings. (Editor: Jonathan P. Vicente)