Local currency bond market seen bouncing back this quarter

MANILA, Philippines - The local currency bond market is expected to bounce back this quarter as interest rates and inflation remain in check.

Investment bank First Metro Investments Corp. (FMIC) said in its monthly Market Call report a significant slowdown in the country’s inflation rate and the Federal Reserve’s decision to continue near zero interest rate policy for a consideration time “infused new life into the bond markets.”

FMIC said demand for local bonds, particularly for the longer end of the curve, is expected to rise in the latter part of the year.

“The market players have reason to hope for a fourth quarter rebound in the domestic bond markets with inflation definitely on a downward path, while interest rates abroad continue to be low as central banks in the Eurozone and Japan have reset their sights to avoid deflation,” the report said.

“With the expected extended pause in monetary policy tightening and only minimal upward movements in longer-term US Treasury bonds, the outlook for local currency bonds has brightened. Further confirmation of these trends in actual data releases will stir up risk appetites and bring year-end yields to slightly lower levels than presently seen,” it added.

FMIC, however, noted that while the  longer end of the curve would likely become more attractive, the shorter end should also see some upward movement in yields as investors might  shift some liquidity to dollar-denominated assets.

Local bonds will “broadly track US treasury bond yield movements although there’s a possibility of a slight narrowing of spreads, as fund managers capitalize on stronger economic fundamentals and external accounts of the Phiilippines vis-a-vis other emerging markets.”

FMIC also sees a slight uptick in trading volume in the secondary bond market.

The domestic corporate bond market expanded by 37.6 percent in the first nine months of the year  to $17 billion, posting the fastest growth in emerging East Asia region.  In the third quarter alone, it grew 11. percent.

The Asian Development Bank’s latest Asia Bond Monitor, however, expects  a faster-than-expected US interest rate hike a stronger dollar cost pose problems for East Asia given increased foreign holdings of Asia’s bonds.

Other concerns cited by the ADB include tightening liquidity in the region’s corporate bond markets as Basel 3 requirements prevent banks from keeping large bond inventories and a property slowdown in China.