Rate cuts seen lifting Philippine bonds from Asia's lowest ranks
Interest rates in the Philippines, after adjusting for inflation, are the highest in emerging Asia. That means Bangko Sentral Ng Pilipinas (BSP) can slash rates further on top of its 125 basis points of cuts over the past year, a move that would favour local debt.
Philippine bonds, along with other local currency debt, are being sought by investors diversifying from US assets as the US dollar weakens in the face of US President Donald Trump's tariffs. The South-east Asian nation's bonds have an edge due to its minimal correlation with Treasuries, which are facing pressure due to US fiscal concerns.
'We have a constructive view on Philippine government bonds, given our views on the inflation outlook,' said Leonard Kwan, a Hong Kong-based portfolio manager at T Rowe Price Group. Their 'de-correlated profile' to Treasuries is another draw for investors, he said.
Benchmark 10-year yields in the Philippines have risen 10 basis points this year to 6.28 per cent, while nearly all other emerging Asian yields on similar tenors have fallen in that period. Peso bonds underperformed amid wider budget deficit expectations and the impact of an earlier rise in oil prices.
However, inflation undershooting BSP's 2 to 4 per cent target for four straight months has positioned Philippine bonds for gains. The local policy rate after adjusting for recent inflation now stands at 385 basis points, the most in emerging Asia, giving the BSP a greater leeway to cut rates.
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The dovish wagers are starting to show up in market forecasts, with the Philippine 10-year yield estimated to fall to 5.67 per cent by year-end, according to a median of economists surveyed by Bloomberg. That level was last seen in October 2024.
Peso bonds are also likely to be more shielded from any losses in US debt as concern over the fiscal deficit and uncertainties over further Federal Reserve rate cuts unsettle markets. The 120-day correlation between 10-year Philippine bonds and Treasuries stands around 0.10, according to Bloomberg calculations, signalling that both assets hardly move in lockstep.
Investors are also watching if JPMorgan Chase would include Philippine debt into its local-currency emerging-market debt index this year.
Citigroup sees the inclusion of Philippine bonds in global indexes providing another tailwind for the nation's bonds, strategists Gordon Goh and Rohit Garg wrote in a note on Monday.
They also recommended maintaining a long currency-hedged position in 10-year Philippine government bonds on expectations of further policy rate cuts and disinflation pressure. BLOOMBERG
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