Philippine 3-Year Bonds Slump as Inflation Spurs Rate Warning

Philippine three-year bond yields rose the most in seven months after data showing the fastest inflation since 2011 prompted the central bank to warn it has less scope to keep the benchmark interest rate on hold.

Bangko Sentral ng Pilipinas will update estimates for consumer prices and gauge whether it needs to adjust its policy stance, Governor Amando Tetangco said yesterday after the government reported inflation accelerated to 4.2 percent in January, the most since December 2011. The central bank kept its overnight borrowing rate at a record low of 3.5 percent today, as predicted by 16 of 17 economists surveyed by Bloomberg. The decision was announced after the markets closed.

“Faster inflation and the governor’s comments signaling that a rate increase may happen sooner than initially thought added pressure to bonds,” said Dave Estacio, assistant vice president at First Metro Investment Corp. in Manila.

The yield on the 6.25 percent sovereign notes due November 2016 climbed 32 basis points, or 0.32 percentage point, to 3.46 percent in Manila, according to noon fixing prices from Philippine Dealing & Exchange Corp. That’s the biggest increase since June 20.

“We still have room to keep rates steady, but given how these factors play out, that room may be narrowing,” Tetangco said. “We will see if any adjustments to the stance of policy are warranted based on the balance of these risks to the inflation outlook over our policy horizon.”

Peso Gains

The central bank has kept borrowing costs on hold since October 2012, when it cut interest rates.

A Credit Agricole CIB research report issued earlier in the day, written by analysts including David Keeble, predicted the Philippines was unlikely to tighten today as the central bank’s language suggested there’s room to wait before raising borrowing costs. The bank forecasts policy makers will boost the rate by 25 basis points sometime this year.

The peso rose 0.3 percent to 45.182 per dollar, according to Tullett Prebon Plc. It touched 45.475 on Feb. 4, the weakest since August 2010. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell two basis points to 6.9 percent.

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