The minutes of the Federal Open Market Committee (FOMC) meeting released on 18 October conveyed a hawkish stance sending US Treasury (UST) yields higher. While the Fed has already signalled that further interest rates hike will be forthcoming, possibility that interest rates would have to go beyond the perceived target rate set at 3.00%, was mentioned. UST yields bear steepened as the 2-, 10- and 30-yr increased by 2.7bps to 2.877%, 2.9bps to 3.180% and 4.1bps to 3.365%, week-on-week, respectively.
Meanwhile, the ROP market demonstrated lack of trading activity on weak market sentiment due to higher UST yields. ROP yields in the 3-, 5-, and 7-yr tenors rose 1bp, 2bps and 1bp, to 3.417%, 3.923%, and 4.216%, week-on-week respectively, while the 10-yr yield remained unchanged at 4.165%.
ROPs are US dollar denominated government securities issued by the Republic of the Philippines (ROP).
In the peso rates market, bid and offer spreads for bonds remained wide and defensive on expectation of another round of policy tightening. Short to medium term bonds 1 to 5 years led the rise in rates as yields climb by an average of 26 bps in the week, while 7 and 10 year bond yields declined, signifying market’s caution to invest in short term debt which are most sensitive to monetary policy changes. Talks on the suspension of oil price hike due January of 2019 saw some relief on inflation pressure. The yield curve flattened-10year bond closed unchanged at 8.05%, 2year at 7.3% (+15 bps) narrowing the 10Y/2Y spread to 75 bps compared to 90 bps the previous week.
WHAT WE EXPECT
After a series of interest rate hikes from both the US Fed and the BSP, financial markets continue to brace for high rates before the year’s close. The US Fed has continued to push for gradual rate increase in line with sustained economic activity, while the BSP is still facing inflation issues t following rising oil prices, weakening currency and typhoon impact on consumer prices. We expect the market to remain defensive ahead of the October CPI figure and the BSP rate setting on November 15.Peso interest rates are expected to remain elevated. Global rates directed by UST is bound to sustain its upward path following the Fed’s guidance on interest rate and positive US economic outlook.