Philippine Bonds Drop Most in Three Months on Policy Tightening

Philippine 20-year bonds fell the most in three months and the peso gained after the central bank raised the rate it pays on special-deposit accounts and Governor Amando Tetangco flagged further tightening.

The 25 basis point increase in the SDA rate it pays to lenders to 2.25 percent yesterday will lead to modest upward adjustments in interest rates, Tetangco said in a Bloomberg TV interview today. The central bank also boosted its inflation forecasts after yesterday’s meeting at which it held the benchmark rate at a record-low 3.5 percent. Money-supply growth exceeded 30 percent for a 10th month in April, while banks’ net lending accelerated to the fastest pace since 2011.

“The unexpected SDA rate hike will encourage more expectations for more hikes given still strong loan growth, flush liquidity and rising CPI momentum,” Citigroup Inc. strategists including Singapore-based Gaurav Garg and Siddharth Mathur, wrote in a report released today. “Yields will rise, with the curve steepening as extended positioning adjusts.”

The yield on the Philippines’ 3.625 percent government bonds due March 2033 climbed 22 basis points, or 0.22 percentage point, to 5.39 percent, in Manila, noon fixing prices from Philippine Dealing & Exchange Corp. show. That was the biggest increase since March 20. The yield, which rose 23 basis points this week, is at its highest level this month.

The Philippines’ interest-rate differential with developed nations and strong economic fundamentals should lure more inflows, Tetangco said in today’s interview.

Inflation Risks

The peso advanced 0.1 percent to 43.790 per dollar, prices from Tullett Prebon Plc show. The currency was little changed for the week. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 21 basis points to 4.67 percent. The gauge dropped nine basis points this week.

The central bank revised the inflation forecast for 2014 to 4.4 percent from 4.3 percent and for 2015 to 3.7 percent from 3.4 percent, citing risks including the El Nino weather pattern, higher food costs and potential increases in power prices. Consumer prices rose 4.5 percent in May from a year earlier, the most in 30 months.

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