THE sharp rate hikes implemented by the Bangko Sentral ng Pilipinas (BSP) boosted the yields for short-term local currency bonds (LCY) while the increases in US interest rates lowered the yields for longer-term bonds, according to the Asian Development Bank (ADB).
In its latest Asia Bond Monitor, ADB said the country’s LCY bonds in the Philippines grew 3.1 percent quarter-on-quarter to P11.5 trillion or $212.4 billion in the first quarter of 2023.
“The increase in yields at the short-end of the curve was in line with the BSP monetary tightening, with a total increase of 425 basis points [bps] from nine rate hikes between May 2022 and March 2023,” ADB said.
“The decline in yields at the longer end was influenced by expectations of a slowdown in domestic inflation. This allowed the BSP to moderate the pace of its rate hike by 25 bps in its 23 March policy meeting before holding rates steady at 6.25 percent on 18 May,” it added.
ADB said the Philippines and Thailand were the only two markets that saw an increase in the 2-year yield of 23 bps due to monetary tightening since January 2023.
Long-term bonds or 10-year bond yields in the Philippines, meanwhile, declined by 48 bps.
The BSP raised policy rates twice for a cumulative total of 75 bps since the start of 2023 while Thailand raised the policy rate by 25 bps each in January.
“Most of the region’s central banks have slowed their rate hikes, and the banking sector turmoil in the US and Europe has had limited impact on regional financial markets so far,” said ADB Chief Economist Albert Park.
“However, in the United States, concern over financial stability and inflation is causing uncertainty about the Federal Reserve’s monetary stance. Financial conditions in the region may continue to be affected by this uncertainty,” he added.
ADB said financial conditions in the region remained largely stable, even amid lingering uncertainty about the US Federal Reserve’s monetary stance and looming risks in the banking sector of major advanced economies.
Equity markets declined and local currencies weakened slightly against the US dollar between March 1 and June 2, while risk premiums narrowed.
The region’s local currency bond stock grew 9.1 percent from a year earlier to $23.8 trillion at the end of March.
The increase was largely driven by governments frontloading debt issuance to finance programs to support economic recovery. Corporate bond issuance remained moderate, partly due to higher interest rates.
Growth in the sustainable bond market in emerging East Asia plus Japan moderated to 5.9 percent from the previous quarter, with total sustainable bond stock reaching $633.9 billion at the end of March.
The Asean+3 region remains the second-largest sustainable bond market in the world, even as it needs more local currency and long-term financing. Green bonds, local currency financing, and private sector issuance dominated sustainable bond issuance in the region.
Image credits: Patrick Roque via Wikimedia Commons CC BY-SA 4.0
BSP’s sharp rate hikes boost yield on LCY bonds
Source: News Paper Radio
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