Upgrade spurs bond rally

Yields on government securities fell across the board last week following a boost from the rating upgrade announced by S&P Global Ratings last Tuesday.

On average, debt yields — which move opposite to prices — went down by 8.7 basis points (bp) week on week, the PHP Bloomberg Valuation Service Reference Rates as of May 3 published on the Philippine Dealing System’s website showed.

“The biggest catalyst that led to the easing in local interest rate benchmarks [last] week has been the surprise upgrade on the Philippine credit ratings by S&P…[which] has fundamentally reduced risk premium and resulted in lower local interest rate benchmarks (PHP BVAL yields) thereby increasing the odds of monetary easing,” Rizal Commercial Banking Corp. economist Michael L. Ricafort said in an email.

“Furthermore, the said S&P upgrade will be positive for the broader economy and for the local financial markets…due to the country’s increased attractiveness for more inflows of foreign portfolio investments and foreign direct investments in view of the country’s improved credit ratings that expanded the roster of international funds that may be allowed to invest in the country, going forward,” Mr. Ricafort added.

S&P raised the Philippines’ long-term sovereign credit rating to “BBB+” from “BBB” last Tuesday — just a step away from single “A” tier — citing the country’s strong economic growth trajectory supported by solid government fiscal accounts, low public indebtedness and the economy’s sound external settings.

The rating was also assigned a “stable” outlook, indicating the country is likely to maintain the grade in the next six months to two years as the economy is expected to remain strong over the medium term.

The debt watcher’s latest rating action puts its assessment of the Philippines a step higher than those of its peers. Fitch Ratings and Moody’s Investors Service affirmed their “BBB” and “Baa2” ratings — a notch above the minimum investment grade — on the country in December and July last year, respectively, with corresponding “stable” outlooks.

Contributing to the easing in local interest rate benchmarks, Mr. Ricafort said, may have also been the easing in money supply growth and demand for loans, which “may also somewhat increase” the possibility of a cut in the large banks’ reserve requirement ratio (RRR) and key policy rates amid a continuous easing trend in inflation.

Domestic liquidity or M3, considered as the broadest measure of money in an economy, grew 4.2% year-on-year to about P11.4 trillion in March, slower than the 7.1% expansion in February and 7.6% growth in January. This pace is the slowest recorded since September 2012.

Meanwhile, outstanding loans increased by 9.9% year-on-year in March, slower than the 13.7% pace logged the previous month. Inclusive of reserve repurchase agreements, bank lending growth decelerated to 9.3% from 13.9% in February.

At the secondary market on Friday, all bond tenors rallied. At the short end, the 91-, 182- and 364-day Treasury bills (T-bill) went down by 3.9 bps, 2.2 bps, and 4.1 bps to yield 5.693%, 5.942%, and 6.064%, respectively.

At the belly of the curve, the rates of the two-, three-, four-, five-, and seven-year Treasury bonds (T-bond) lost 6.2 bps (5.899%), 6.3 bps (5.849%), 7.9 bps (5.813%), 10.1 bps (5.789%), and 13.7 bps (5.779%).

Meanwhile, at the long end, the 10-year T-bond saw its rate go down by 16 bps to 5.805%. Likewise, the 20- and 25-year tenors also went down by 8.5 bps and 16.8 bps, yielding 5.981% and 6.099%, respectively.

For this week, Mr. Ricafort said debt yields could “continue their easing trend” as latest inflation data to be released tomorrow is expected to slow further to below 3%.

Likewise, he noted the policy review by the Bangko Sentral ng Pilipinas’ Monetary Board on Thursday, during which he expects key policy rates to be cut by at least 25 bps and/or big banks’ RRR to be slashed by at least 1 percentage point from the current 18%.

“Benchmark government bond yields in developed countries mostly hovered among the lowest levels in 2-3 years recently… Thus, the search for higher yields/returns by international investors/fund managers in emerging markets such as the Philippines — especially after the country’s latest credit rating upgrade — could still lead to further easing in local interest rate benchmarks…amid easing trend in inflation as well,” Mr. Ricafort added. — MAM