MANILA: The prospect of an interest-rate cut in the Philippines is powering a rally in the nation’s bonds, putting them ahead of Indonesia’s as monetary policy outlooks take center-stage for investors.
The benchmark 10-year Philippine bond yield has slumped since the start of May while the Indonesian equivalent stayed elevated, widening the gap to the most since September 2022. Their yields are likely to diverge further as Bangko Sentral ng Pilipinas gears up for a rate cut as early as August, while fiscal deficit and currency concerns weigh on Indonesian bonds.
The Philippine and Indonesian 10-year bonds both offer yields of more than 6 per cent, which are some of the highest among investment-grade nations in the world. The near-term outlook for peso bonds is turning increasingly favorable as inflation moderates to below 4 per cent from a peak of nearly 9 per cent early last year.
"The Indonesian market has become more challenging compared to before,” said Jerome Tay, fixed-income fund manager at abrdn Plc in Singapore, citing reports around a potential increase in the debt-to-gross domestic product ratio.
In the Philippines, the "inflation story has turned and it has been moderating,” which gives the central bank the ability to cut rates possibly before the Federal Reserve, Tay added.
BSP chief Eli Remolona said earlier this month that the central bank won’t need to wait too long to lower borrowing costs and that an August rate cut is possible.
Meanwhile, in Indonesia there is rising concern over increased spending by President-elect Prabowo Subianto’s administration and reports that they are considering scrapping a ceiling on the deficit are adding to market jitters. Those concerns are outweighing the boost to bonds from cooling inflation in the country.
"Markets are positioned for the risk of lower fiscal prudence by the incoming administration,” Radhika Rao and Chua Han Teng, analysts at DBS Group Holdings Ltd., wrote in a note referring to Indonesia.
Philippine local debt is set to hand investors a return of 2.5 per cent this month, the most in Asia, according to a Bloomberg index of local-currency government bonds. Indonesian debt is poised for 1.7 per cent return during the same period, after outperforming Philippine bonds in the second quarter.
Bank Indonesia left its key rate unchanged on Wednesday (July 17) and signaled patience before pivoting to an easing stance amid depreciation pressure on the rupiah. However, the central bank signaled it may have room to cut borrowing costs later this year.
"Both markets will continue to perform, albeit a slower pace for Indonesia compared to the Philippines,” said abrdn’s Tay. That may lead to the wide yield spread between the two nations persisting through the end of the year, he added. - Bloomberg
