Philippine Bonds Drop on Quickening Inflation Risks; Peso Falls

Philippine government bonds dropped before inflation data next week that may show the fastest gains in almost two years.

The four-year yield climbed to a five-month high as economists predict consumer prices rose 4 percent in December, the quickest pace since January 2012, according to the median estimate in a Bloomberg survey before the Jan. 7 report. Bangko Sentral ng Pilipinas expects inflation to accelerate to a range of 3.8 percent to 4.7 percent from 3.3 percent in November, Governor Amando Tetangco said on Dec. 26, citing higher costs of electricity, fuel and some food items.

“The market is awaiting inflation figures to gauge whether this will impact inflation projections for 2014 and BSP’s rhetoric on inflation and policy rates,” said Bunny Bernardo-Recto, first vice president at CTBC Bank Philippines in Manila.

The yield on the 5.875 percent notes due December 2020 rose 16 basis points, or 0.16 percentage point, to 3.99 percent today, the highest since July 12, according to midday fixing prices at Philippine Dealing & Exchange Corp. The rate climbed 15 basis points yesterday. Philippine markets were shut from Dec. 30 to Jan. 1 for holidays.

The peso fell 0.4 percent to 44.648 per dollar at the close today in Manila, the weakest since Sept. 2, according to Tullett Prebon Plc. The currency declined 7.5 percent in 2013, the worst performance in five years.

Dollar Strength

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 17 basis points today and 32 basis points this week to 6.67 percent.

“Global dollar strength will continue to weigh on emerging-market currencies including the peso and may put pressure on peso rates for the year,” Bernardo-Recto said. Higher bond yields will attract some funds and liquidity will continue to cap rates, she said.

Asian bond yields are moving higher along with rates on U.S. debt as the Federal Reserve prepares to trim its stimulus that’s fueled demand for emerging-market assets. Ten-year U.S. Treasury yields were at 2.97 percent today. They may rise to 3.38 percent by year-end, based on a Bloomberg survey of economists, with the most recent forecasts given the heaviest weightings.

“With U.S. Treasury yields at 3 percent and moving higher, the dollar is bound to appreciate further,” said Alan Cayetano, the foreign-exchange trading head at Bank of the Philippine Islands. The peso may test 44.75 in the coming days, he said.

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