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Philippine Bonds Drop on Deficit, Inflation Outlook; Peso Drops

Philippine bonds declined on concern a widening budget deficit and rising inflationary pressures will damp demand for the nation’s debt. The peso weakened.

The shortfall in February was probably “substantially bigger” than 16 billion pesos ($372 million), Budget Secretary Butch Abad said on March 24. The government forecast a wider deficit in the first half of the year as President Benigno Aquino ramps up spending on roads and bridges, he said. Inflation will probably accelerate in February, Bangko Sentral ng Pilipinas Governor Amando Tetangco said today.

“At the back of everyone’s mind, there is anxiety on inflation and expectations of a widening deficit,” said Jill Singian, senior manager for treasury at the Bank of the Philippine Islands in Manila. “It will give some pressure in the short term. There will be knee-jerk reactions.”

The yield on the 8 percent bonds due July 2031 rose five basis points, or 0.05 percentage point, to 6.05 percent as of 4:33 p.m. in Manila, according to Tradition Financial Services. The peso fell 0.2 percent to 43.065 per dollar, prices from Tullett Prebon Plc showed. One-month implied volatility, a measure of exchange-rate swings used to price options, fell to 5.75 percent from 5.79 percent.

The Philippines will probably reduce the amount of securities it offers at weekly auctions in the three months starting April after raising a record amount from debt sold to individuals last month, Treasurer Roberto Tan said March 26.

Bond Auctions

The government auctioned 9 billion pesos each week in the first quarter as it sought to raise 117 billion pesos to fund its budget deficit. The Southeast Asian nation sold a record 179.8 billion pesos of 15- and 20-year retail bonds in February. The Bureau of the Treasury will announce its second-quarter borrowing plan this week.

“The government was able to beef up their cash position and a plan to reduce borrowings will give more support to bonds,” Singian said.

The Philippines reported a deficit of 15.9 billion pesos for January, the smallest in five months. The government forecast the shortfall to widen to 279 billion pesos this year from 197.8 billion pesos in 2011.

Consumer prices in the Philippines, which imports most of its energy needs, rose 2.7 percent from a year earlier in February, the smallest increase since September 2009.

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