Photographer: Taylor Weidman/Bloomberg

Asia’s Best Bond Rally Quickens as Philippine Central Bank Eases

  • Ten-year note yield near record low as reserve cut considered
  • AllianceBernstein says move would add $1.5 billion to system

Philippine bonds are outpacing Asian peers as the nation’s central bank considers cutting lenders’ reserve ratios for the first time in four years, a move that investors estimate would inject at least $1.5 billion into the financial system.

Government bonds are poised for the strongest two-month rally since 2013, Bloomberg bond indexes show, spurred by July 13 comments from Bangko Sentral ng Pilipinas Governor Amando Tetangco that he may reduce the amount of cash banks must set aside. He said the rate cut announced in May was policy neutral and implemented as part of a shift to an interest-rate corridor system to make policy more effective.

A reduction in the reserves would be in line with the easing bias seen in the region as central banks act to counter a slowdown in global demand and the fallout from Britain’s shock vote to exit the European Union last month. China, India, Indonesia and South Korea have all lowered rates in the past year.  

“Fundamentals remain attractive and the new government’s economic policies remain supportive of growth,” said Bertram Sarmago, a Singapore-based Asian fixed-income investment director at Nikko Asset Management Co., which was overseeing $164 billion as of March. “Flush liquidity in the domestic system and the perceived easing with the change in the monetary policy framework are driving gains in Philippine bonds.”

Nikko Asset projects a one percentage point cut in reserves would add about 85 billion pesos ($1.8 billion) to the financial system and boost bonds in the short term. AllianceBernstein LP estimates it would inject about 70 billion pesos.

Governor Tetangco is seeking to strike a balance in monetary policy after announcing new auctions of short-term securities in May to absorb some of the excess liquidity that’s driven yields to near record lows. Deputy Governor Diwa Guinigundo said last week that any reduction in reserves will be gradual.

The yield on the 10-year note plunged 1.25 percentage points last week, the most since 2008, according to fixing prices from Philippine Dealing & Exchange Corp.

President Rodrigo Duterte pledged in his first state of the nation speech on Monday to improve on the economic policies of his predecessor, including lowering taxes and easing restrictions on foreign investment. The Philippine stock index has gained 3.5 percent in July, poised for its third straight monthly gain, the longest rally in more than a year.

Spreads Shrink

The 3.30 percent yield on the nation’s 10-year bond is approaching the unprecedented 2.75 percent seen in May 2013, prompting AllianceBernstein to be cautious about how much further the rally can go. The premium on Philippine debt over U.S. Treasuries has halved in the past three months to 25 basis points, near the smallest gap since 2013, Bloomberg’s index shows.

“The level now is close to the trough in 2013 and we expect most of the rally is already done,” said Vincent Tsui, a Hong Kong-based economist at AllianceBernstein, which was overseeing $490 billion as of June. “Lower bond yields are mainly liquidity, rather than fundamentals-driven, and it would be hard to call for the bottom of the current rally.”

A Bloomberg index of peso sovereign debt returned 5 percent in the past three months, more than the 4.6 percent in Indonesia and 2.3 percent in Malaysia. The gauge is headed for an eighth monthly gain.

“The 10-year government bond yield is likely to stay near current levels -- it might go up 10 or 20 basis points but it’s just a fluctuation and not really reversing the trend,” said Christopher Salazar, a senior vice president and the head of financial markets group at First Metro Investment Corp. in Manila. “The market as a whole still doesn’t see significant pressure for rates to go up, both in the U.S. and locally.”

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