State bonds to stay most appealing, but equities worth a second look

MANILA, Philippines — Government bonds will likely stay appealing to investors as rising inflation and bleak economic outlook drive them to safety, although more risky corporate assets and equities may be worth a look especially with the central bank pledging to keep rates low for the time being. 

“ROPs will continue to mildly attract investors in search of better returns amidst stable currencies especially considering the robust external position of the country,” analysts at First Metro Investment Corp. (FMIC), an investment bank, and University of Asia & the Pacific (UA&P) said in their monthly joint report released Thursday.

Based on FMIC and UA&P’s tracking, yields for 10-year local bonds finally “corrected” from its 11-month high of 4.66% on March 22 despite rallying US Treasury yields and slight easing of inflation at home. 

That was all thanks to the Bangko Sentral ng Pilipinas’ promise to keep interest rates low to pump prime economic activity even in the face of mounting inflation risks. With rates kept at bay and amid deteriorating economic prospects, investors are seen likely swarming government securities, considered a safe haven with little chance of default.

At the same time though, FMIC and UA&P said a “stable” low interest environment, which the central bank had signaled will stay for quite a time, should provide an impetus for investors to diversify to more risky corporate bonds. Companies are out to borrow to replace dwindling profits, researchers said, and therefore “are willing to take the risk to rack up debt papers.”

“We have seen interest rates at its highest and lowest points already. With benchmark rates stabilizing, we do not see them breaking through their thresholds, unless a major catalyst emerges,” they said.

The risk appetite may even go beyond bonds toward equities. After projecting that the Philippine Stock Exchange index is poised to stay at 6,500 level for the second quarter, FMIC and UA&P are now saying the bourse may rebound “more definitively” as the economy gains steam. Listed firms which have direct or indirect relationship with infrastructure development should benefit the most.

Indeed, the analysts pointed to better economic numbers, including jobs generation and manufacturing performance, since the last monthly report was released. They noted of new restrictions enforced in Metro Manila and four nearby areas, but barely skimmed through their implications by saying brighter economic data recently— including an inflation slowdown—provided a “sigh of relief.”

“Headline inflation eased…Nonetheless, we still expect it to remain above 4.0% in H1 (first half) as core inflation has not budged and supply side concerns re-emerge,” analysts said. Inflation, as measured by the consumer price index, averaged 4.5% year-on-year as of March.

At the bond market, improving demand for longer-dated government bonds are pushing down yields after a brief scare from rising Treasury yields in the US. However, FMIC and UA&P warned this may be short-lived unless inflation falls below the upper-end of the BSP’s 2-4% annual target by the second quarter, “which we do not think will happen.”

“With the National Government’s cash position still fat, its net new borrowing from the market would have little effect, and so domestic inflation remains as the key metric to watch and analyze closely,” FMIC and UA&P economists said.