Philippine government bond yields rise as BSP tightening sharpens inflation focus

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Philippine bond yields rise

Highlights

BSP unexpectedly raises benchmark rates by 50 basis points to combat inflation, marking its first such hike in nearly four years and fourth straight tightening in 2023.
Most government bond yields rise week-on-week, with 364-day bills up 11.48 basis points to 6.4341% and two- to five-year bonds climbing 12.79–18.9 basis points.
Peso closes at a record low of P63.615 against the dollar after five consecutive sessions of losses, while inflation hits 7.2% in September, above the BSP's 3% target.

BSP decision drives curve repricing

As reported by BusinessWorld Online, yields on government securities traded in the secondary market are mostly higher last week as markets focus on the Bangko Sentral ng Pilipinas' policy decision and the inflation outlook.

Based on the PHP Bloomberg Valuation Service Reference Rates as of Oct. 23 published on the Philippine Dealing System's website, GS yields, which move opposite to prices, edge up by an average of 0.19 basis point week on week. At the short end, the 91-, 182-, and 364-day Treasury bills rise by 7.74 basis points to 5.7538%, 8.24 basis points to 6.1495%, and 11.48 basis points to 6.4341%, respectively.

In the belly of the curve, the two-, three-, four-, five-, and seven-year Treasury bonds climb by 12.79 basis points to 7.1886%, 16.64 basis points to 7.4925%, 18.9 basis points to 7.7121%, 17.58 basis points to 7.8496%, and 9.18 basis points to 7.979%. At the long end, the 10-year bond adds 3.56 basis points to 8.054%, while the 20- and 25-year notes fall by 51.88 basis points to 7.8668% and 52.09 basis points to 7.8639%.

University of Asia and the Pacific economist Marco Antonio C. Agonia says peso weakness and inflation concerns keep most yields moving upward during the week, although easing U.S. Treasury yields reduce pressure on the tail end of the local curve. He says institutional buying in 20-year and 25-year bonds after yields move above 8% distorts the average movement of the curve and pulls those long-end rates lower week on week.

The Monetary Board on Thursday raises benchmark rates by 50 basis points, a move expected by only two of 22 analysts in a BusinessWorld poll, while the rest look for a 25-basis-point increase. The increase marks the BSP's first 50-basis-point hike in nearly four years and its fourth straight tightening move this year, bringing cumulative increases since April to 125 basis points.

Inflation, peso pressure and auctions shape outlook

The BSP says the decisive move is needed to address broadening price pressures and keep inflation expectations anchored amid upside risks, including expectations of strong El Niño conditions in the coming months. The central bank keeps its inflation forecast at 6.1% for this year, raises its 2027 estimate to 6% from 5.4%, and leaves its 2028 forecast at 3.3%.

Headline inflation returns to this year's peak of 7.2% in September as oil, food, housing and utility costs rise again. That marks the seventh straight month inflation remains above the BSP's 3% target, with the year-to-date average at 5.4%.

The peso also closes at record lows for five straight sessions last week. On Friday, it falls by 9.5 centavos to P63.615 against the dollar after touching a new intraday low of P63.62.

Mr. Agonia says the market is now awaiting the U.S. Federal Reserve's Oct. 27-28 policy meeting, with futures implying a 90% probability of a hold. He adds that a Fed pause could help contain upside pressure on the 10-year tenor, although inflation expectations, Middle East developments and the Fed decision may still trigger repricing across the curve.

He also says the Bureau of the Treasury's dual-tenor bond auction this week may move yields in the belly of the curve. The government wants to raise a combined P35 billion on Tuesday, including P25 billion from seven-year bonds with a remaining life of two years and 11 months, and P10 billion from 10-year securities with a remaining life of nine years and three months.

Our earlier article on planned Philippine sovereign bond reforms outlined how a new pricing convention for peso government bonds and targeted inclusion in J.P. Morgan’s Government Bond Index-Emerging Markets could improve comparability, liquidity, and price discovery for Philippine debt. It also stressed that any lasting benefits for borrowing costs and the broader economy still hinge on global rate conditions, fiscal credibility, and deeper capital-market development beyond government securities.

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