Philippine bonds most vulnerable in emerging Asia to Fed hikes

Philippine bonds are the most vulnerable in emerging Asia to a hawkish Federal Reserve, according to an analysis by Bloomberg.

The nation’s sovereign debt was the worst performer in the region during the two most recent episodes of Fed tightening, namely those that began in 2017 and 2022. Philippine 10-year yields climbed by an average of 152 basis points during those periods — nearly four times as much as those of second-placed India.

Philippine bonds have been sold off this year as energy prices have soared and US Treasury yields have climbed, while a strengthening dollar has lured funds away from peso-denominated assets. The prolonged conflict involving Iran is also weighing on the nation’s sovereign debt by keeping oil prices and inflation elevated.

“Higher US yields could continue to exert upward pressure on Philippine bond yields, particularly at the longer end, while also weighing on the peso,” said Rong Ren Goh, a fixed-income portfolio manager at Eastspring Investments in Singapore. Other headwinds for the bonds include “persistent inflation, peso weakness and uncertainty” over the final level of the Philippine central bank’s policy rate, he said.

Philippine bonds have handed dollar-based investors a loss of more than 11% this year through Thursday, while a similar gauge for Asia as a whole has gained 3.1%, data compiled by Bloomberg show.

Fed Chairman Kevin Warsh signaled on Wednesday that the central bank remains on track to raise interest rates again this year, even as he stuck to his refusal to offer any explicit guidance on the future path of policy.

The peso has weakened about 8% against the dollar this year, making it Asia’s worst-performing currency after the Indonesian rupiah. That depreciation is putting further pressure on Bangko Sentral ng Pilipinas to hike rates again after making a bigger-than-expected 50-basis-point increase last week.

“Currency stability has become an important consideration in the policy reaction function, complementing the BSP’s efforts to contain inflation expectations,” said Peerampa Janjumratsang, a portfolio manager for fixed income at M&G Investments in Singapore. This, together with risks from the El Niño weather pattern, suggests the central bank “may retain a hawkish bias despite the weaker growth backdrop,” she said.

Indonesian bonds were historically the most sensitive in Asia to Fed policy changes but Bank Indonesia’s debt-purchase program that started in 2020 appears to have mitigated some of the impact of US rate hikes. The central bank’s ownership of outstanding government bonds rose to peak at around 27% in January 2023 from around 10% at the start of 2020.

Investors should be cautious about Philippine bonds amid a “backdrop of elevated energy prices and El Niño risks,” Citigroup Inc. strategists including Gordon Goh wrote in a note last week. “Risks in the current environment are skewed heavily towards a more hawkish BSP.” —  Bloomberg