Philippine Peso Drops Most in Three Months as Yield Gap Narrows

The Philippine peso fell the most in more than three months on concern the nation’s yield advantage will narrow as the Federal Reserve raises interest rates.

U.S. borrowing costs will increase faster than previously predicted, according to economists surveyed by Bloomberg News from June 12-16. Data yesterday showed U.S. inflation was the fastest in May since October 2012 on an annual basis. The difference in yield between the Philippines 10-year notes and U.S. Treasuries narrowed 14 basis points this month to 153 basis points, according to data compiled by Bloomberg.

“Players are adjusting their positions” after the U.S. inflation numbers, said Joey Cuyegkeng, an economist in Manila at ING Groep NV. “There are expectations of hawkish statements from the Fed.”

The peso dropped 0.6 percent to 44.110 per dollar in Manila, prices from Tullett Prebon Plc show. That was the biggest loss since March 20 and pared the currency’s gain this year to 0.6 percent.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, increased 16 basis points to 5.15 percent.

Bangko Sentral ng Pilipinas will keep its overnight policy rate at a record low of 3.5 percent tomorrow, even after inflation surged to a 30-month high of 4.5 percent in May, according to 13 of 18 economists in a Bloomberg News survey. Five expect a 25 basis point increase.

BSP will probably raise forecasts for consumer-price gains this year and next as pressures build even as inflation remains within target, Governor Amando Tetangco told reporters in Manila today. Policy makers were aiming to keep the average rate within a 3 percent to 5 percent range in 2014, and within 2 percent to 4 percent in 2015.

The Fed ends a two-day meeting today and is expected to announce a $10 billion cut to its bond-purchase program, the fifth such move, according to a Bloomberg survey.

The yield on the Philippines’ 3.875 percent government bonds due November 2019 rose seven basis points, or 0.07 percentage point, to 3.56 percent, prices from Tradition Financial Services show. That’s is the highest level this month.

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