PESO FIXED INCOME
MARKET REVIEW: The BSP announced a similar cut in the Reserve Requirement Ratio (RRR) for small banks by 2%, following the same schedule imposed on universal banks. This will free up an estimated PHP 22Bn liquidity in the system. Local bond trading activity picked up as market players purchased more fixed income securities added ahead of the 1% RRR cut effective May 28. Investors favored short-term securities given the rich yields relative to the long-term bonds. The 10-yr BVAL benchmark rate declined 5bps to 5.74%, while the 2-year benchmark rate dropped 7bps to 5.72%, week-on-week.
MARKET OUTLOOK: Key drivers for the week ahead will be the 10-year bond auction. A break below 5.7% may advocate some profit taking. Short term rates have room to further decline. April Money Supply and Bank Lending data may still be weak but the recent cut in the RRR will allay concerns on downward risks to growth. Interest rates may stabilize from these levels until the CPI data due first week of June.
DOLLAR FIXED INCOME
MARKET REVIEW: At the week’s close, the UST yield curve bull flattened, with the 2-, 5- , 10- and 30-yr declining 4bps, 6bps, 7bps and 7bps, respectively. The initial optimism from the 90-day delay on Huawei Technologies Co. sanctions was overshadowed by pessimism on the US-China trade war and the deterioration of manufacturing numbers in US and Europe. The 2-, 5, 10- and 25-year ROP yields fell 4bps, 2bps, 1bp and 1bp, respectively, as ROPs continued to track UST movement.
MARKET OUTLOOK: The FOMC minutes released this week reiterate a “patient approach to policy adjustments”, indicating a steady monetary stance in the short term. Market expectations of a Fed rate cut is back on the table with forecasts pointing to a 79% probability in December. Meanwhile, developments on the US-China trade spat will continue to drive risk sentiment and impact near term UST movement. Issue will drag until the G-20 Summit in end-June, where market expects some clarity if not a resolution to the dispute. We expect ROP yields to continue to track UST trend.