Foreign direct investment (FDI) inflows and the Bangko Sentral ng Pilipinas’ (BSP) latest policy moves are expected to influence the Philippine fixed-income market in the coming months.

Jean de Castro, head of fixed income for Manulife Investment Management, said the country’s strong FDI performance signals confidence in the economy and could provide a cushion for investors.

“Consistent FDI growth signals strong international confidence in the Philippines’ economic fundamentals, policy direction, and long-term prospects,” De Castro said.

“This positive sentiment can attract further portfolio investments into local bonds, deepen market liquidity, and encourage longer-term commitments from both domestic and foreign investors.”

Net FDI inflows in May 2025 hit $586 million, up 21.3 percent from a year earlier, data from the BSP showed. De Castro said this momentum supports demand for local currency debt and could anchor yields while strengthening overall market resilience.

Impact of BSP’s rate cut

The BSP cut its policy rate by 25 basis points to 5.0 percent on 28 August, even as inflation rose to 1.5 percent from 0.9 percent in the same month. De Castro noted that the move provides “immediate support” to short-term bonds, since yields at the front end of the curve typically adjust fastest to policy changes.

“If the central bank signals further easing, short-duration instruments become attractive against this backdrop,” she explained.

Still, the uptick in inflation complicates the outlook for longer-dated bonds. “If inflation continues to surprise on the upside, long-term yields may rise, reflecting increased inflation risk and potential for the BSP to pause in its cutting cycle,” De Castro said.

In such a scenario, De Castro suggested that investors could consider a barbell strategy — allocating to short-term bonds to capture near-term policy benefits while selectively adding long-term exposure if inflation expectations remain contained.

Growth vs inflation

The Philippine economy grew 5.5 percent year-on-year in the second quarter, but rising inflation is emerging as a key challenge for bond investors.

“Strong GDP growth underpins corporate earnings and reduces default risk, typically resulting in tighter credit spreads, especially for fundamentally sound issuers,” De Castro noted.