PESO FIXED INCOME
MARKET REVIEW: June CPI printed at 2.7%, below market expectation of 2.8% and May ’s inflation of 3.2%. The Bureau of Treasury fully awarded its newly issued 3-yr bond (FXTN3-24) at a coupon rate of 4.75%, lower than the market estimates of 4.875%-5.00%.
Strong two-way interest was evident during the week as sellers continued to lock in gains amid low yields while buyers picked up bonds in anticipation of lower inflation print. Yields fell post the 3-yr bond auction and following dovish comments from BSP Governor Diokno. The belly to long-dated bonds which comprised most of the trades declined by as much as 7bps. The 10-yr BVAL benchmark closed the week 7bps lower to 5.00%, while the 2-year benchmark rate dropped 12bps to 4.83%, week-on-week.
MARKET OUTLOOK: Two-way action may still dominate the market causing yields to trade sideways.
DOLLAR FIXED INCOME
MARKET REVIEW: It was a shortened yet active week for the US Treasuries market. The UST yields initially traded higher amid positive sentiments from the recently concluded G20 summit and on reports that US manufacturing picking up in June. However, UST yields reversed its course towards midweek as it tracked the movement of UK Gilts after dovish comments from BOE Governor Carney regarding Brexit deal and global trade war. News that the Fed is likely to appoint potentially dovish members in key positions, coupled with weaker than expected ADP employment and ISM non-manufacturing data contributed to further decline in yields. At the end of the week, UST yields rose again, led by the 10-Yr moving back above the 2% level, following a strong job reports (224,000 actual vs 160,000 estimates). The UST yields for 2-,5-,10- and 30-yr tenors ended higher by 11bps, 6bps, 3bps and 1bp to 1.86%, 1.83%, 2.04% and 2.54% w/w, respectively. Meanwhile, ROPs saw decent demand during the week, bucking UST trend. ROP yields for the 2-,5-,10- and 25-yr tenors decreased by 2bps, 8bps, 18bps and 10bps to 2.33%, 2.33%, 2.49% and 3.06% W/w, respectively.
MARKET OUTLOOK: With US Treasury yields testing levels below 2%, ROP credit spreads will remain tight, supported by local demand for bonds. Despite the mixed economic data last week, the market still expects the Fed to cut policy rates as soon as the 31 July meeting. The US economic calendar for the coming week is relatively light with FOMC minutes and June CPI in focus. We see ROPs to trade sideways in the near term, until a clear UST trading range is established.