Philippine Bonds Gain as SDA Rate Cut Seen Tomorrow; Peso Gains

Philippine bonds rose on speculation the central bank will cut the interest rate on its special-deposit accounts, spurring investment in local debt. The peso snapped a two-day decline.

Bangko Sentral ng Pilipinas will lower the SDA rate to 2 percent from 2.5 percent at tomorrow’s meeting after two reductions this year, according to 12 of 16 economists surveyed by Bloomberg News. Three predicted a cut to 2.25 percent, while one forecast no change. All 19 surveyed on the benchmark overnight borrowing rate said it would be kept at 3.5 percent.

The yield on the 9.125 percent bonds due September 2016 fell 28 basis points, or 0.28 percentage point, to 2.1 percent, according to Tradition Financial Services. The rate is at the lowest since the notes were first sold in 2006.

“The market is expecting a 50-basis-point cut in the SDA rate, which could be supporting the rally in bonds,” said Deanno Basas, investment director for fixed income at ATR KimEng Asset Management Inc. in Manila. “After that, authorities may review what else can be done in the facility.”

The peso gained 0.1 percent to 41.285 per dollar at the close in Manila, according to Tullett Prebon Plc. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 11 basis points to 4.70 percent.

Rate Corridor

The central bank isn’t ruling out a further cut in the so-called SDA rate and is “always thinking of additional measures” to manage liquidity, Felipe Medalla, a member of the central bank’s Monetary Board, said on April 18. Inflation slowed to 3.2 percent in March from a five-month high of 3.4 percent in February, the government reported this month.

Bangko Sentral cut the rate it pays on about $46 billion in the SDAs by half-a-percentage point each in January and March, while holding its benchmark measure at a record low as it shifts to an interest-rate corridor approach, which Governor Amando Tetangco said last month was intended to give greater policy flexibility.

The central bank announced on April 18 that it’s doubling the amount of dollars residents can freely buy and broadened the range of approved outward investments to spur capital outflows and slow the peso’s gains.

Before it's here, it's on the Bloomberg Terminal.