Philippine Two-Year Bonds Decline on Rate-Tightening Speculation

Philippine two-year bonds fell the most since May on concern the central bank may start tightening policy and after Federal Reserve Chair Janet Yellen said the U.S. monetary authority may raise interest rates.

Bangko Sentral ng Pilipinas may take “pre-emptive” action by increasing the special-deposit account rate at the next meeting on March 27, Nomura Holdings Inc analysts including Euben Paracuelles and Rob Subbaraman wrote in a report released today. Thirteen of 14 analysts in a Bloomberg News survey expect the central bank to hold the benchmark overnight borrowing rate, while one forecasts an increase of 25 basis points.

The yield on the 6 percent bond due March 2016 rose 43 basis points, or 0.43 percentage point, to 2.97 percent, according to noon fixing prices from the Philippine Dealing & Exchange Corp. That’s the biggest jump since May 29, 2013.

“The market was spooked by hawkish statements from the BSP and the Fed,” said Jill Singian, a trader in Manila at Bank of the Philippine Islands. “The consensus among the players are the BSP will tweak its policy on Thursday. The question now is which tool and what magnitude.”

The BSP favors “early, measured adjustments in monetary policy” because gradual movements are less disruptive and will help businesses plan better, Governor Amando Tetangco said in a mobile-phone message last week. Yellen said the U.S. monetary authority’s stimulus program could end in the second half of this year and the benchmark interest rate may start rising six months later.

Rates, Peso

The Philippines central bank has kept its overnight borrowing rate unchanged at a record low of 3.5 percent since October 2012. The central bank last year cut the rate on the so-called special deposit accounts three times to 2 percent. It reduced the effective reserve requirement ratio for banks to 18 percent in April 2012. The BSP may raise the special-deposit account rate by 25 basis points, while the policy rate may be left unchanged, according to the Nomura report.

The peso halted a six-day decline, gaining 0.5 percent to 45.095 per dollar in Manila, according to Tullett Prebon Plc. Last week, the currency fell 1.45 percent, the biggest five-day drop since the period ended June 21.

The peso’s gain is “probably a correction to the underperformance last week,” said Joey Cuyegkeng, an economist at ING Groep NV in Manila. “There is also less import demand for now.”

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 12 basis points to 6.03 percent.

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