Philippines bond yields see biggest increase

MANILA, Philippines — The Philippines is expected to see the highest bond yields among Asia-Pacific nations due to inflationary pressures from rising oil prices and the US Fed rate hikes.

In a report, Oxford Economics said the Philippines may post the largest increase in yield spreads this year due to a number of factors.

The Fed, for one, is expected to hike rates by as much as 175 basis points this year, with US Treasury yields set to rise by a total of 95 basis points.

“Alongside a 95-basis-point rise in the US 10-year yield, we expect this will lead to Asian 10-year yields rising by between 25 basis points in China and 110 basis points in the Philippines,” Oxford lead Asia economist Sian Fenner said.

“While we expect risk sentiment to improve in late 2022, we think the Philippines will see the largest increase in yields by the end of the fourth quarter,” she said.

Fenner warned that such yields could rise further should external financial conditions tighten.

Fenner noted that another factor is the negative terms of trade shock and increase in inflation from higher oil and commodity prices.

This is particularly negative for bond returns of current twin deficit economies such as the Philippines.

The so-called “twin deficit” is already threatening the pace of recovery in the Philippines.

A twin or double deficit happens when a country has both a current account deficit and budget deficit, which means that imports are higher than exports and the government is spending more money than the revenues it is generating.

The Philippines remains to be one of the largest net commodity importers in the region and thus faces high domestic inflation pass-through risks.

Subsequently, the widening deficit in the country is expected to place the peso under additional depreciation pressure over the coming quarters and Fenner said this would also weigh on bonds.

Further adding to the list of headwinds that the country is facing is inflation.

Fenner said headline inflation in the Philippines may hover above five percent over the coming quarters.

The central bank already raised its inflation outlook for the year to 4.3 percent from the 3.7 percent expectation in February.

Inflation in January and February was steady at three percent as lower food costs managed to offset the upward pressure from transport due to rising oil prices.

The Philippine Statistics Authority will release the March inflation data today. Market consensus is for inflation to soar to 3.9 percent for the month.