Yields of 5 and 10 Philippine Treasury Bonds Spike to 5-Year Highs, Will the BSP Raise Rates?

Only in the Philippines…

 

89.11 points in 2 days! That would be about 1.06% change from last Friday’s close.

More importantly, marking the close represents the pillar to record PSEi!

And guess, which issues were the major beneficiaries?

To the main event…

Philippine 10-year bond yields have consecutively spiked in 3 days. From a tight clasp by unseen forces, this benchmark yield, as I noted last weekend, had been emancipated. Put differently, the markets may have been allowed to determine the present levels of the benchmark yield

And the sharp increases have not been confined to the 10-year but had also been manifested in the (monthly) yield of the 5-year bond which likewise has reached 5-year highs.

 

The question is WHY?

The BSP’s monetary board will meet this Thursday, whence they will render a decision on its monetary policy.

Because the government have become too acutely dependent on free money, I am not inclined to think that they will be raising rates

However, the actions in the bond markets appear to indicate otherwise

 

Remember the 10 successive months of 30+% money supply growth rates? The resultant levitated inflation pushed the 10-year bond yield up. Eventually, the BSP raised rates.

When the BSP launched its silent stimulus in late 2015, the benchmark yield initially reacted by falling. The BSP responded by chopping interest rates to its momentous lowest levels in June.

From then (June 2016) to the present, the same benchmark yield has risen way above the 2014 levels. And more importantly, such level has remained significantly elevated for over a year.

Since current yield levels have been HIGHER than in 2013-14, inflation rates could have actually been LARGER than those reported by the BSP and the PSA

In its report yesterday, which reported October CPI at 3.5%, the BSP said “The resulting year-to-date average inflation rate of 3.2 percent remains within the Government’s target range of 3.0 percent ± 1.0 percentage point for 2017”

The irony is that the inflation target and the inflation statistic which is supposed to be measured are both constructed by the government. Thus the government can make the inflation statistic say anything.

Nevertheless, the numbers have been on the high side of the target.

Moreover, one multinational institution has warned for the second time in three months that the economy “can be overheating”.

Some questions

Has actions in the bond market, the peso and real economy been persuasive enough to impel BSP to tighten soon? And or, will the BSP succumb to pressures to institute a hike?

If they do hike or tighten, how deep would it be? Would this be offset by the BSP’s stealth stimulus (and reserve requirement cut)?

Interesting.