Although the risks are near term, the local currency bond market should be able to weather headwinds as the continued trade war between the US and China and interest rate adjustments in developed economies, the Asian Development Bank (ADB) said on Tuesday.
According to ADB chief economist Yasuyuki Sawada, the region’s policymakers should closely monitor market developments and prepare against potential shocks that may arise.
“Concerns about emerging markets are looming, but ultimately, Asia’s strong fundamentals should attract investors back to the region’s local currency bonds markets,” Sawada said.
In addition, the report said that across local currency bond tenors, yields spiked to an average of 189 basis points (bps) with the seven-year benchmark exhibiting the largest increase at 250 bps followed by five- and one-year tenors, at 247 bps and 116 bps, respectively.
Similarly, two- and 10-year government bonds contracted by 50 bps.
“The jump in interest rates was spurred by concerns over high inflation and expectations of additional policy rate hikes before the end of the year from both the Bangko Sentral ng Pilipinas and the United States Federal Reserve at their next respective monetary policy meetings,” the report explained.
“Given these expectations, investors preferred short-term tenors over long-term tenors. The Bureau of the Treasury (BTr) frequently rejected Treasury bond bids as investors asked higher-than-expected rates,” it added.
This was evidenced with the series of full-award decisions on the BTr’s short-term borrowings, driven by signs that inflation is finally tapering-off that enabled the market to anchor expectations and confidence.
“With minimal issuance in sovereign bonds, the Philippines’ bond market size was little changed as of end-September at $107 billion, growing 0.9 percent on quarter. The size of the government bond market expanded 0.04 percent on a quarterly basis and 9.0 percent on a yearly basis to $85.0 billion, while the corporate bond market expanded 4.3 percent on quarter and 20.1 percent year-on-year to $22.0 billion,” the report said.