Philippine Bonds, Peso Decline as Inflation Forecasts Raised

Philippine bonds and the peso fell as the central bank raised its inflation forecasts for this year and next after holding interest rates at a record low.

Bangko Sentral ng Pilipinas kept its overnight borrowing rate at 3.75 percent, a decision predicted by 16 of 20 economists in a Bloomberg News survey. Inflation may average 3.4 percent this year and 4.1 percent in 2013, compared with earlier projections of 3.1 percent and 3.2 percent, respectively, Deputy Governor Diwa Guinigundo said today, citing higher oil prices and supply disruptions after last month’s floods. Policy makers aim to contain price gains between 3 percent and 5 percent.

“While the inflation forecasts are still within their target, they seem to be more cautious now given the current risks and those in the pipeline,” said Radhika Rao, an economist at Forecast Pte in Singapore.

The yield on the Philippine government’s 5 percent bonds due August 2018 rose two basis points, 0.02 percentage point, to 4.52 percent as of 4:12 p.m. in Manila, according to Tradition Financial Services.

The peso fell 0.4 percent to 41.76 per dollar, prices from Tullett Prebon Plc show. Onshore trading in the currency, which reached a four-year high of 41.445 yesterday, ended before the central bank announced its rate decision. One-month implied volatility, a measure of exchange-rate swings used to price options, was unchanged at 5.5 percent.

No New Stimulus

The Philippines doesn’t need additional monetary stimulus and is prepared to “recalibrate” existing measures to deal with capital flows if needed, said Guinigundo. Foreign funds added $2.14 billion to holdings of Philippine stocks so far this year, more than fourfold the amount a year earlier, fueling currency gains that threaten to hurt exports. Policy makers will curb excessive volatility in the exchange rate as it tends to disrupt business activity, he said.

Bonds also fell as the nation prepares to sell debt to individual investors, boosting the supply of fixed-income securities in the market.

The government has mandated Land Bank of the Philippines and Development Bank of the Philippines for the sale of retail bonds, Deputy Treasurer Eduardo Mendiola said this week. The Bureau of Treasury will probably sell 25-year notes, he said, without saying how much money will be raised or giving a timeframe for the issuance. The government sold a record 179.8 billion pesos ($4.31 billion) of securities in February.

Investors “are pricing a supply risk with the upcoming retail bond issuance,” said Jan Briace Santos, a fixed-income trader who helps manage the equivalent of $17 billion at BPI Asset Management Inc. in Manila. “They’re cautious in buying, especially longer tenors.”

To contact the reporter on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net; Clarissa Batino at cbatino@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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