Philippine Bonds Advance as Imminent Rate Increase Seen Unlikely

Philippine government bonds rose, with the two-year yield dropping the most in two weeks, and the peso strengthened after the central bank signaled an imminent interest-rate increase is unlikely.

Bangko Sentral ng Pilipinas raised lenders’ reserve requirements to 19 percent of deposits from 18 percent yesterday, and left its overnight borrowing rate and that on special-deposit accounts unchanged. The reserve-ratio increase was meant to prevent potential asset bubbles, while the policy and SDA rates “have remained appropriate for now,” Governor Amando Tetangco told Bloomberg Television today.

“Some market participants may be tempering their expectations on the speed and urgency of tightening even if the general direction is for higher rates,” said Lito Mercado, head of trading at Rizal Commercial Banking Corp. in Manila.

The yield on the 9.125 percent bonds due September 2016 fell nine basis points, or 0.09 percentage point, to 2.54 percent as of 4:46 p.m. in Manila, the biggest decline since March 10, according to Tradition Financial Services. The yield fell four basis points this week.

The peso strengthened 0.3 percent today and 0.9 percent this week to 44.885 per dollar at the close in Manila, according to Tullett Prebon Plc. The currency completed its best week since the five days ended Sept. 20. One-month implied volatility, a measure of expected peso swings used to price options, fell seven basis points today to 5.99 percent.

“We are not wedded to any particular policy action and we have a number of tools that we can deploy as necessary,” Tetangco said. “Any next moves on the part of the central bank are always going to be data-dependent.”

Inflation Forecast

BSP lowered yesterday its average inflation forecasts for this year and next to 4.2 percent and 3.2 percent, respectively, from 4.3 percent and 3.3 percent earlier. While consumer-price gains are within the goals for 2014 and 2015, the estimates are above the mid-point of the target ranges, Tetangco said today.

The Philippines’ external accounts will remain in surplus “even if we correct data for noted discrepancies,” Tetangco told Bloomberg TV. Import figures may have been understated, in part due to smuggling, undermining the strength of the current account and the peso, Deutsche Bank AG and Credit Suisse Group AG said in reports this month. The local currency weakened 9 percent against the dollar in the past 12 months as U.S. stimulus cuts spurred outflows from emerging markets.

“The reports have actually not affected sentiment on the peso in any significant way,” Tetangco said. “The peso has been reacting more to global developments,” he said. The currency will continue to take its cues from overseas movements and the monetary authority is ready to take steps to curb volatility if needed, Tetangco said.

The current-account surplus widened last year to $9.4 billion, or 3.5 percent of gross domestic product, from $6.9 billion in 2012, the central bank reported on March 21.

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