Philippine Two-Year Bonds Drop as Tightening Concern Builds

Philippine two-year bonds fell, pushing the yield to a three-week high, on speculation the central bank will raise borrowing costs to rein in inflation.

Consumer-price gains quickened to 4.5 percent in May from a year earlier, the fastest since November 2011, data showed on June 5. That prompted Governor Amando Tetangco to say the same day that he wouldn’t “hesitate to adjust policy” should the 3 percent to 5 percent inflation target be at risk. Only four of 11 economists surveyed by Bloomberg predict a rate increase at the June 19 meeting and the rest see no change.

“We are advancing our rate-hike forecast from the July meeting to June, as the inflation momentum has increased,” said Emilio Neri, an economist at Bank of the Philippine Islands in Manila. “Inflation might creep up to 5 percent and if no action is taken, we might be behind the curve.”

The yield on the government’s bonds due 2016 rose 27 basis points, or 0.27 percentage point, to 2.43 percent, according to Philippine Dealing & Exchange Corp. That was the biggest increase since April 7.

The peso rose 0.1 percent to 43.78 per dollar at the close in Manila, Tullett Prebon Plc. prices show. It fell 0.3 percent this week. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, dropped eight basis points today and 13 basis points this week to 4.74 percent.

“The room to keep rates steady has narrowed,” Tetangco said on June 5. Four of the economists surveyed expect a quarter percentage point increase in the 3.5 percent key rate next week.

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