Philippine bonds, Asia’s second-best performers, will extend a rally that pushed yields to record lows as a cooling global recovery stops policy-makers from raising borrowing costs, according to Manulife Asset Management.
“We see potential for rates to drop further,” Endre Pedersen, managing director of Asian fixed income at Manulife Asset in Hong Kong, said in a September 6 interview. “Asia isn’t going to get help from Europe and the US to grow. We’ll probably see less inflation.”
Benchmark 10-year yields have fallen more than two percentage points from this year’s high of 7.79 percent on January 21 to 5.77 percent, according to prices from Philippine Dealing and Exchange Corp. The rate reached 5.7 percent on September 6, the lowest since Bloomberg began tracking the data in 1998. Peso securities returned 10.7 percent over the past year, second only to the 21.3 percent in Indonesia among 10 local-currency debt indexes tracked by HSBC Holdings Plc.
Renewed concern that Europe’s debt crisis is worsening, and Standard & Poor’s downgrade of the US’s top credit rating drove a 3.4-percent drop in the Philippine benchmark stock index last month, driving investors into government debt. Peso bonds handed investors a return of 2.5 percent during the period. Inflation slowed for a second month to 4.7 percent in August from 5.1 percent in July, government data show. The Bangko Sentral ng Pilipinas (BSP) held its benchmark rate at 4.5 percent last week.
HSBC recommended buying the Philippines’ 6.5-percent debt due April 2021 late last month, forecasting the yield will drop to 5.4 percent in two months on speculation the Federal Reserve may embark on a third round of bond buying that boosts the supply of dollars, increasing the amount of funds available to be invested in emerging-market assets.
The peso weakened 0.3 percent last month as overseas funds sold $121 million more local shares than they bought. The currency has advanced 3.1 percent this year.
“Philippine government bonds are becoming increasingly resilient to downturns in risk appetite and will remain supported given reduced inflation pressure,” Pin Ru Tan, a strategist at HSBC Securities Asia Ltd. in Hong Kong, said in a September 8 interview.
Five-year credit-default swap contracts for the Philippines traded at 178 basis points on September 9, less than the 182 for Indonesia, according to data provider CMA which compiles prices quoted by dealers in the privately negotiated market. The markets insure debt against nonpayment, and traders use them to speculate on credit quality.
Fitch Ratings gives the Philippines a local-currency debt rating of BBB-, the lowest investment grade and one step higher than Indonesia’s. Moody’s Investors Service rates the Philippines at Ba2, two levels below investment grade and one ranking lower than Indonesia. Standard & Poor’s assesses both nations at BB+, the highest noninvestment grade.
The BSP has raised its benchmark interest rate twice this year, in March and May, by 25 basis points each time. The central bank may cut its rate as early as next month if the Fed “does something” at its policy review on September 20 and 21, Tim Condon, head of Asia research at ING Groep NV, said last week.
“Behind-the-curve hysteria rather than the need to reduce monetary accommodation was behind the BSP’s two rate hikes this year,” Singapore-based Condon said. ING predicts the benchmark five-year bond yields will fall to 4.5 percent by year-end from 4.79 percent on September 9.
The BSP sees “no urgency to change the course” of its monetary policy stance, Deputy Governor Diwa Guinigundo said after last week’s rate review.
Banco de Oro Unibank Inc. is advising clients to buy longer-maturity bonds. Ryanna Talan, who helps manage about $12 billion of assets at the bank’s trust group, said the 10-year yield may fall to 5.5 percent.
“We don’t see inflation as a threat,” said Talan. “It could be peaking already at these levels, and the central bank is bound to be supportive of growth. GDP growth in the second quarter was disappointing, not spectacular at all.”
