MANILA: Philippine sovereign bonds are extending a selloff as traders price in the prospect of a 50-basis-point rate hike, the largest since 2023.
The outlook for peso bonds deteriorated after data last week showed inflation accelerated at the fastest pace in three years in April.
It pushed up the three-month peso swaps to as high as 5.13%, implying expectations of a 50 basis points (bps) rate increase at the next policy decision on June 18.
Surging rate hike bets underscore how rapidly price pressures have permeated the Philippine economy, which remains heavily reliant on Middle Eastern oil imports.
The resulting selloff in Philippine bonds has handed a loss of more than 10% for dollar-funded investors since the start of the Iran war, making it the worst-performing debt in emerging Asia, according to a Bloomberg index.
“We are bearish on Philippine government bonds relative to other rate markets in the region, mainly because the Philippines is more exposed to elevated energy costs without a rigid fuel subsidy regime,” said Shaoyu Guo, an emerging market sovereign fixed-income analyst at T. Rowe Price Group Inc.
A 50-basis-point rate hike at the next Bangko Sentral ng Pilipinas meeting in June “would be a done deal”, unless the energy crunch fades, Guo said.
Supply-side pressure is compounding the bearish view on bonds, while domestic political turmoil, which this week led to the impeachment of vice-president Sara Duterte, has not helped sentiment.
A five-year government bond auction on Tuesday drew the weakest demand in nearly 13 years. Bids at that auction were 1.28 times the offering size, the lowest since September 2013. A three-year auction on May 5 received bids 1.23 times the issuance size, the lowest since May 2022.
The government also appeared more willing to accept bids with higher yields, which risks raising its cost of borrowing at a time when it’s looking to ramp up spending.
The spread between the highest and average bid yield at the latest auction stood at 20 bps, the widest since 2022.
Rising macro pressures are weighing on all major Philippine asset classes.
The peso is hovering near a record low, while the benchmark stock index has fallen 1.7% this year, trailing all South-East Asian peers except Indonesia.
While the broader market retreat deepens, some analysts see the bond selloff as an entry point. Aberdeen Investments sees current levels as attractive for adding Philippine bonds, as it views the pricing of rate hikes as aggressive.
Still, “it’s hard to have a target right now for the 10-year yield given how volatile the environment is and how sensitive the Philippines is to global oil prices,” said Shivank Sehgal, an investment analyst at the firm. — Bloomberg
