Philippine government bond yields mixed as weak GDP offsets U.S. inflation pressure

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Philippine bond yields mixed

Highlights

Short-term Philippine government bond yields rise sharply with 91-, 182-, and 364-day T-bills up 26.79, 16.47, and 10.63 bps to 6.1926%, 6.5536%, and 6.7769%, respectively, as US inflation pressures dominate.
Medium- and long-term bond yields fall, with the 10-year dropping by 18.26 bps to 7.73%, after Q3 Philippine GDP growth slows to 2.1% year-on-year—below the 2.7% survey estimate and weakest ex-pandemic since 2009.
Trading volume declines to P15.37 billion from P43.83 billion week-on-week, with analysts expecting yields to retain an upside bias due to persistent inflation pressures and hawkish central bank outlooks.

Yield moves across the curve

As reported by BusinessWorld Online, short-term Philippine government debt comes under pressure as investors factor in the risk that stronger U.S. inflation could keep the Federal Reserve on a hawkish path, while weaker local growth supports demand for longer-dated bonds.

Based on PHP Bloomberg Valuation Service Reference Rates published on the Philippine Dealing System’s website as of Nov. 13, GS yields, which move opposite to prices, inch up by an average of 0.71 basis point week on week. At the short end, the 91-, 182-, and 364-day Treasury bills rise by 26.79 bps, 16.47 bps, and 10.63 bps to 6.1926%, 6.5536%, and 6.7769%, respectively.

At the belly and long end, moves are mixed. Yields on the three-, four-, five-, and seven-year Treasury bonds fall by 1.99 bps to 7.4952%, 5.31 bps to 7.6308%, 8.75 bps to 7.7082%, and 12.83 bps to 7.7845%, while the two-year tenor inches up by 0.31 bp to 7.2661%. The 10-year bond drops by 18.26 bps to 7.73%, while the 20- and 25-year tenors edge up by 0.1 bp and 0.61 bp to 7.8717% and 7.8759%, respectively.

Trading activity is lighter, with GS volume reaching P15.37 billion on Friday, down from P43.83 billion a week earlier.

Growth concerns and inflation outlook

Analysts say weaker-than-expected Philippine economic growth pulls down medium- to long-term yields as investors grow more cautious about the strength of the domestic economy and reassess the need for further Bangko Sentral ng Pilipinas tightening.

Philippine gross domestic product expands by 2.1% year on year in the July-to-September period, slower than 4% a year earlier and the revised 2.4% in the second quarter. The reading marks the slowest growth since the 3.8% contraction in the first quarter of 2021 during the pandemic and, excluding the pandemic years, the weakest in more than 16 years since the 1.8% expansion in the fourth quarter of 2009. It is also below the 2.7% median estimate in a BusinessWorld poll of 16 economists and analysts.

At the same time, short-dated yields face upward pressure after U.S. consumer inflation rises by 0.4% in October, above market expectations and reinforcing bets on another Fed rate hike in December. Traders say a more hawkish Fed could weaken the peso and force the BSP to remain alert to currency pressures and rate differentials.

Broader market sentiment also shapes trading. Safe-haven demand for U.S. Treasuries, helped by geopolitical concerns and risk-off sentiment in equities, weighs on dollar yields and feeds through to lower peso yields at the long end. Still, lower oil prices, the peso’s recent recovery and expectations of sizable domestic fuel rollbacks help improve sentiment by easing forward inflation concerns despite October’s 7.8% inflation reading.

For the coming week, analysts say yields may retain an upside bias because of persistent domestic and U.S. inflation pressures and a hawkish central bank backdrop. Investors are also watching minutes of the Fed’s latest October meeting, along with oil prices, peso moves, domestic fuel adjustments, U.S. economic data and BSP guidance, for clues on whether tightening expectations need to be recalibrated.

As we previously wrote, BSP policy trade-offs highlighted the challenge of fighting inflation while growth momentum weakens.

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