Philippine Bond Relief Rally Is Meeting Institutional Skepticism

j}o}nceo)lwm3[5]2m8[jsvo_media_dl_1.png Bloomberg

Article content

(Bloomberg) — Philippine bonds are staging emerging Asia’s biggest rebound following an interim US-Iran deal, but market watchers warn that inflation risks and a hawkish central bank may cap the bounce.

Article content

Both Western Asset Management and William Blair Investment Management expect oil prices to stay elevated and the El Niño effect to spur supply shocks, prompting the Bangko Sentral ng Pilipinas to remain hawkish. This creates a fundamentally bearish backdrop for the nation’s peso fixed-income market, signaling to investors that the recent surge in bond prices may not be sustainable.

Article content

Article content

Article content

“We would remain underweight on Republic of the Philippines Government Bonds,” said Desmond Fu, a portfolio manager at Western Asset Management in Singapore, citing expectations of further interest-rate increases in the nation.

Article content

Article content

Philippine bonds have outperformed their peers as 10-year yields fell by around 50 basis points following the June 15 US-Iran interim agreement to reopen the Strait of Hormuz. The rebound follows a brutal selloff during the escalation of the conflict from late February through June 12 that saw yields on the bonds skyrocketing by 157 basis points.

Article content

BSP Governor Eli Remolona signaled the possibility of another rate increase in August following a 25-basis-point hike on June 18, the central bank’s second consecutive hike. The BSP also raised its 2026 inflation forecast to 6.4%, well above its 2% to 4% target. Goldman Sachs Group Inc. expects three more quarter-point hikes to 5.50%, while noting current forecasts don’t fully account for El Niño-driven supply shocks, as per its June 18 note.

Article content

Furthermore, Philippine interest rates are failing to keep pace with inflation. Even after delivering 50 basis points of hikes since the conflict’s outbreak, the BSP still carries emerging Asia’s most negative real policy rate at minus 205 basis points. This backdrop keeps the peso vulnerable and further builds the case for a BSP rate hike.

Article content

Article content

Union Bank of the Philippines projects Philippine 10-year yields to hover around the current level of 7% in the next two quarters citing uncertainties around the Federal Reserve’s policy path and global rates, according to Ruben Carlo Asuncion, chief economist at the bank.

Article content

However, market bets on higher BSP interest rates are already pushing policy-sensitive two-year Philippine yields higher. The gap between these short-term yields and the current central bank policy rate has jumped to 156 basis points from 90 basis points before the conflict.

Article content

“Trading in Philippine peso government bonds has been highly volatile, with yields repricing significantly wider following recent inflation prints, driven by an energy supply shock,” said Clifford Lau, a portfolio manager at William Blair in Singapore.

Article content

“We expect the BSP to maintain a hawkish stance,” he said.

Article content

—With assistance from Karl Lester M. Yap.

Article content