Recovery secured as yield rise to normalize despite US influence
MANILA, Philippines (UPDATE 6:32 p.m., Feb. 26) — Domestic interest rates are tracking a surprise surge in US yields overnight on Friday, but the government expects this to be short-lived and rates to normalize on the back of central bank guidance.
“Rates will stabilize since market is mindful of (central bank) Gov. (Benjamin) Diokno pronouncements,” National Treasurer Rosalia de Leon said in a Viber message.
“Liquidity continues to be abundant,” she said. Diokno has not responded to request for comment.
Local yields on Friday have followed an unexpected uptick in US Treasuries that saw the 10-year benchmark breaching a 12-month high to hit 1.61%, according to Bloomberg data. On the same day, Manila time, yield of comparable 10-year local bond rose to 3.89%, up from 3.59% on Wednesday and just 3% in end-2020.
The three-month bond yield, meanwhile, inched closer to 1%.
Yields climbing can complicate a government strategy to recover from the pandemic hinged on keeping rates low so that borrowers get cheaper fund access to finance purchases and investments. The Bangko Sentral ng Pilipinas (BSP) has aggressively cut policy rates by 200 bps last year to spur lending, with real interest rates in negative territory because of an inflation uptrend for the past 4 months.
If yields continue to steepen, which De Leon does not expect, the immediate impact will be on government finances. If that happens, the Duterte administration will be forced to accept heftier interest when borrowing, at a time debt is accumulating to bridge a record deficit and finance COVID-19 vaccine purchases.
Lower interest rates also matter as debt maturities get shorter, meaning more obligations are falling due earlier than before. Average residual maturity of debts shortened to 7.57 years, the shortest since 2005, and De Leon herself earlier said government is taking advantage of lower rates to temper deficit risks.
More broadly, keeping a tight lid on yields help keep bank credit cheap for borrowers who now need them the most to salvage a business, make investments or even just spend more for the economy.
Despite rising yields however, De Leon is unperturbed. With rates at the floor, she said there is space for them to go up before they become worrisome. “Rates are still low even with marginal increases. In fact, (we have) negative real rates,” she said.
BSP has also committed to keep liquidity flowing, she said, with “adequate buffers to deploy” when needed. Asked if faster inflation could prompt investors to ask for higher returns, De Leon echoed the BSP and said “inflation spike is transitory.” Inflation hit a 2-year peak of 4.2% in January and expected by BSP to end 2021 at 4%, the high-end of its target.
Sought for comment, Eduardo Francisco, president of BDO Capital, also assuaged fears of a spike in interest rates. “We have a lot of liquidity. Only a credit downgrade of the country will make rates rise,” he said in a text message.
Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said the rate “correction” should be “healthy” for a market expecting a pick-up in economic activity this year. “Thereby (this) could not threaten economic recovery prospects,” he said in an email.
"The main risk to this year's recovery remains to be the uncertainties over the vaccine rollout and its subsequent effect on recovery expectations in consumer and business confidence," Rastine Mackie Mercado, research director at China Bank Securities Corp., said in an email.
But for Emilio Neri Jr., lead economist at Bank of the Philippine Islands, rising US rates may stunt the depressing impact of BSP’s short-term lending to the government in market rates. “Debt monetization is what can keep rates from continually rising,” he said.
“(But) rising inflation, rising US rates, weaker peso are the ones pushing rates up. The problem is debt monetization may not work forever especially if the economy is weak,” Neri explained in an online exchange.
Editor's note: Updated with Friday's benchmark yields.
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