With the Fed on its rate tightening path, a fiscal stimulus of Trump-led government and a flight to US assets, the bond mar-ket sold off. Following the victory of the Donald Trump as the 45th President of the US, financial markets shifted its focus on the global effect of the Trump leadership, new cabinet and policy reforms. Despite the pronounced uncertainty over trade and immigration policies advocated by the Republican-run government, the bond market further weakened. The move was contrary to expectation that a flight to safety is in order. The market instead traded to advance US stock market to record highs betting on stronger US economy to be delivered by the expansionary fiscal policy of the new government. This conse-quently raised the probability of Fed tightening by 25 bps points in its December 14 meeting to 84% from 71% in October.
As US Treasury yields rise, global bond yields follow.
While the relationship between the direction of US Treasuries and global bond yields remain positive, the stress on Emerg-ing Market bond yields have been more pronounced. Investors have asked for more premium to hold or invest in Non-US assets on fear that President-elect Trump will pursue his campaign on increased protectionism that will hurt economies de-pendent on trade and remittances from the US and hurt economies dependent on China.
Clearly, the spike in bond yields was a combination of the expected Fed tightening in December and the unexpected Trump win that would accelerate US growth with its increased fiscal spending and the Risk-Off mode to Non-US assets.
US 10-year Treasuries reached 2.2%, highest since December 2015. Philippine dollar bond (ROPs) maturing 2026 at 3.25% and 10-year Peso Bond (FXTN) at 4.36% have erased the year's gains. The Philippine Peso traded at past 49 to a dollar was weakest since December 2008 and trails the performance of other Asian currencies, reflective of weak demand for local assets.
The shock in interest rates is not inconsistent with the surprise outcome of a major event, like the US elections. The Fed's path to normalization and gradual rate adjustments remains intact. Economic health of other major economies like EU, Ja-pan, China and UK have not weakened and stimulus is seen to remain in place to support tepid growth.
Local economy not immune from global market shifts
Local key policy rate and inflation expectations remain unchanged for the year with policy tightening view in 2017 as inflation picks up. Rates are expected to ease from current stress levels as developments on new US economic policies unfold and become clearer but market volatility is expected to persist pending US policy developments, Brexit concerns and changes (if any) in monetary policy direction of the Fed. With the current backdrop, the fixed income funds will keep cash and duration benchmark neutral.
Philam Asset Management, Inc. (PAMI) recommends investors to stay invested until situations become certain. For further updates and information on the local and international market, please visit www.philamfunds.com.ilippines come from (or are reported by correspondent banks/money transfer operators with head offices in) the United States. In the last twelve months, remittances recorded 26.38 billion U.S. dollars – or 4.58 billion U.S. dollars more than the country’s external trade deficit. Remittances “bankroll” the local economy’s need to import.