PESO FIXED INCOME
MARKET REVIEW: As trading closed for the week, the BSP announced a cut to the reserve requirement ratio for universal banks by 1 percentage point to 15% in early November. The move is in line with Diokno’s pledge to bring the RRR down to single digits. Yields should move lower once effective, as this increases domestic liquidity in the system.
For the week, local peso yields moved downward in a two-way market on thin volume. Overall, the yield curve flattened, with the short-ends closing higher by 2-4 bps and the long-ends lower by 3-6 bps.
MARKET OUTLOOK: The money supply and inflation data releases on September 30 and October 4, respectively, are the risk-events to look out for in the near-term. Yields should continue to trend lower, as September CPI is expected to print as low as 1.0% year-on-year.
DOLLAR FIXED INCOME
MARKET REVIEW: It was a volatile week in the US Treasury market. Political turmoil in Washington dragged yields lower, with House Democrats launching an impeachment inquiry into US President Trump over his interactions with Ukraine President Zelenskiy, where the former allegedly abused his power by urging the latter to investigate Joe Biden.
On the trade front, a deal with China could come sooner than thought as goodwill was shown between the two parties with the US waiving tariffs on Chinese products, and China buying more American goods.
Given the impeachment noise, unresolved issues on trade, and mixed economic data, US Treasury yields ended lower by 3-5 bps across the curve as demand for safe haven assets increased, with the 2-, 5-, 10, and 30-yr benchmarks closing at 1.632%, 1.562%, 1.680%, and 2.129%, respectively. On the other hand, ROP yields widened further against US Treasuries, as market players trimmed positions due to several uncertainties. Week on week, the 2- and 5-yr ROPs fell by 1.7 and 5.3 bps to 2.15% and 2.10%, respectively, while the 10- and 25-yr ROPs rose by 2.8 and 3.6 bps to 2.31% and 2.74%, respectively.
MARKET OUTLOOK: In addition to US President Trump’s impeachment probe, market players will need to keep a close eye on trade talk developments for market direction. The US manufacturing and jobs reports will headline data releases this week and should also provide guidance on the path of interest rates.