Philippine Peso Bonds Rise as Further SDA Cut Seen This Week

Philippine bonds due 2019 rose, pushing the yield to a record low, on speculation the central bank will cut the interest rate on its special-deposit accounts this week to curb gains in the peso.

The yield on the notes has fallen 106 basis points since Jan. 24, the day the central bank cut the rate it pays on $46 billion of its SDAs to 3 percent from more than 3.5 percent. Bangko Sentral ng Pilipinas cannot rule out a further reduction, Governor Amando Tetangco said in a March 4 e-mail. Inflation remains manageable, he said the next day as a report showed consumer prices rose 3.4 percent in February from a year earlier.

“The central bank has room to further cut the SDA rate given favorable inflation,” said Jonathan Ravelas, the Manila-based chief market strategist at BDO Unibank Inc., the nation’s largest lender. He predicts a 50-basis-point cut in the rate at the March 14 policy meeting.

The yield on the 3.875 percent bonds due November 2019 fell three basis points, or 0.03 percentage point, to 2.83 percent, the lowest since the notes were sold in November, as of 4:53 p.m. in Manila, according to Tradition Financial Services.

The monetary authority is “prepared to tweak existing measures or introduce new ones as may be appropriate,” Tetangco told reporters on March 8.

The peso closed little changed at 40.68 per dollar, according to Tullett Prebon Plc. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 16 basis points, to 3.93 percent.

Rate Corridor

The peso is the best-performing Asian and emerging-market currency in the past 12 months. Bangko Sentral will keep its benchmark overnight borrowing rate at a record low 3.5 percent on March 14, according to all 15 economists surveyed by Bloomberg.

“The change in SDA pricing could be viewed as an initial step towards transitioning” to an interest-rate corridor approach, Tetangco said in his March 4 e-mail, referring to a policy band that will give BSP greater flexibility.

The Philippines has accumulated “quite large reserves” of dollars, as a result of intervention to slow peso gains and curb volatility, the International Monetary Fund’s resident representative Shanaka Peiris said at a forum today in Manila. Without BSP’s intervention, the peso would have “exhibited more volatility,” Peiris said.

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