Philippine Bonds Drop This Week as Recent Rally Seen Excessive

Philippine government bonds declined this week on speculation a rally that drove the 25-year yield to a six-month low was overdone. The peso fell.

Sovereign notes, which had advanced in anticipation of a third cut this year in the interest rate the central bank pays on its special-deposit accounts, slumped after Bangko Sentral ng Pilipinas lowered it to 2 percent from 2.5 percent yesterday. The decision was predicted by 12 of 16 economists surveyed by Bloomberg News. The benchmark overnight borrowing rate was left at 3.5 percent.

“Some people took profit after the rally in bonds, spurred by expectations of the SDA rate cut,” said Ryanna Berza-Talan, a Manila-based fund manager at BDO Unibank Inc.’s trust group that oversees almost $20 billion in assets. “It’s the classic sell-on-news. At some point yields will become attractive again to a very liquid market in search of investments.”

The yield on the 6.125 percent notes due October 2037 rose 31 basis points, or 0.31 percentage point this week and 18 basis points today to 4.1 percent as of 4:24 p.m. in Manila, the highest level since April 11, according to prices from Tradition Financial Services. It reached 3.7 percent on April 22, the least since the securities were sold in October.

The peso rose 0.1 percent today to 41.222 per dollar, paring its weekly decline to 0.4 percent at the close, according to Tullett Prebon Plc. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell four basis points to 4.61 percent.

Outflow Impact

The reductions in the SDA rate and last year’s decision to ban foreign funds from the deposit facility haven’t led to significant outflows, Deputy Governor Diwa Guinigundo told reporters yesterday. Bangko Sentral needs to see “all data points” to determine if more cuts can be made, he said.

Bangko Sentral lowered the rate on $46 billion in the special-deposit accounts by about half-a-percentage point each in January and March, while holding its benchmark measure at a record low. 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.

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