El Niño is already making its mark in the Philippines in more ways than one, helping accelerate a slide in the nation’s bonds that were once Asia’s hottest.
(Bloomberg) — El Niño is already making its mark in the Philippines in more ways than one, helping accelerate a slide in the nation’s bonds that were once Asia’s hottest.
Peso notes handed investors a loss of 1.8% so far in July, extending their drop since the start of June to 3.5% on a currency-hedged basis, according to data compiled by Bloomberg. That’s a stark reversal from their stellar performance in the first five months of this year, when the notes were emerging Asia’s top performer.
The plight of Philippine debt underscores the challenges facing the region’s policymakers, who are trying to keep a lid on inflation without tipping their economies into a recession. Central banks also face pressure to keep up with the Federal Reserve’s tightening stance in order to preserve inflows into domestic assets.
In the case of the Philippines, bonds are coming under fire on worries that the central bank may have to start raising interest rates again to counter an expected increase in price pressures. A higher minimum wage for some workers, coupled with costlier transport and food due to El Niño are likely to stoke inflation.
Consumer-price gains eased to 5.4% in June after jumping to a 14-year high in January. But they remain above the central bank’s target and are likely to accelerate in the coming months.
Rice prices have surged to the highest level in more than two years and the government warned that nearly a third of Philippine provinces may experience a drought early next year due to El Niño, In addition, the minimum wage of private sector workers in the capital region will be raised starting July 16 while fares for some railways are set to increase in August.
However, some analysts say peso bonds have fallen far enough to create a buying opportunity.
“There are price risks we are seeing now but these will be temporary,” said Robert Dan Roces, chief economist at Security Bank Corp. in Manila. “The assumption is that inflation will slow to within the target range and the central bank will maintain a rate hold.”
Buying Opportunity
The yield on 10-year government notes is forecast to decline to about 5.8% by the end of the year from 6.49% on Thursday, according to Security Bank, China Banking Corp. and Rizal Commercial Banking Corp. Bangko Sentral ng Pilipinas has also indicated that rates will remain on hold, allaying investors’ fears.
“It’s a good opportunity to buy as once the yields reverse their upward course, there is potential for significant trading gains,” said Michael Ricafort, chief economist at Rizal Commercial in Manila.
Bond bulls also take comfort from the fact that the central bank expects price gains to decelerate to its target range of 2% to 4% by the fourth quarter.
“Macroeconomic fundamentals point to yields coming off from these highs,” said Domini Velasquez, chief economist at China Banking in Manila. “The medium-term outlook is pretty bullish for bonds.”
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