BSP ‘most aggressive’ in hiking policy rates

Bangko Sentral ng Pilipinas (BSP) Complex
Bangko Sentral ng Pilipinas Complex

THE Bangko Sentral ng Pilipinas (BSP) is now considered the “most aggressive” Central Bank in the region in terms of hiking policy rates leading to an increase in the country’s two-year bond yields, according to the Asian Development Bank (ADB).

In its latest Asia Bond Monitor, the Manila-based multilateral development bank said the yields increased by an average of 74 basis points (bps) for bonds with maturities of two years or less. The largest increase in yields, ADB said, were in one-year tenor bonds at 134 bps, followed by the 6-month tenor at 111 bps.

“The rise in yields at the shorter end of the curve was largely driven by the monetary policy tightening stance of the BSP,” ADB said. “The BSP has become the most aggressive central bank in the region, raising rates consecutively since May for a total of 175 bps. The moves were largely in response to rising inflationary pressure.”

However, there was a decline in yields for bonds whose maturities reached three years or longer. ADB said the yield curve flattened, the spread of the 10-year over the 2-year maturity fell from 262 bps on June 15 to 132 bps on August 15.

This, ADB noted, was the largest decline among emerging East Asia’s bond markets. The bank said the outstanding stock of LCY bonds totaled $194.3 billion at the end of June.

The bank said the decline in yields for longer-term bond maturities was largely due to “market expectations that the United States [US] Federal Reserve would adjust its monetary policy tightening stance to be less aggressive.”

ADB said the Philippines continued to “suffer from negative investor sentiment” leading to foreign investor outflows from its stock market each month from March to July.

“For the January–July period, the Philippines also recorded negative outflows from its government bond market, though positive inflows were noted in the months of May, June, and July. This led the Philippine peso to depreciate significantly versus the US dollar by 9.1 percent year-to-date through 24 August,” ADB said.

Meanwhile, the ADB said the long-term bond yields in emerging East Asia declined between June 15 and August 24 amid mounting risks and a dimming economic outlook, even as financial conditions eased modestly.

ADB said yields of 10-year local currency government bonds dropped while yield curves flattened, according to the latest issue of Asia Bond Monitor.

Both are typically signals that investors expect slower economic growth.

Currencies in the region continued to depreciate against the US dollar amid the weaker outlook.

“Market optimism over a milder US Federal Reserve tightening supported a modest  improvement in financial conditions,” said ADB Chief Economist Albert Park. “But this seems to have been short-lived, as the Fed has been pretty clear in recent weeks that further interest rate hikes are likely. Financial conditions in the region may continue to tighten.”

Financial conditions in emerging East Asia eased moderately from mid-July to mid-August, when equity markets rallied, risk premiums narrowed, and portfolio inflows returned amid speculation that the United States Federal Reserve would slow the pace of interest rate hikes.

However, ongoing and renewed risks have continued to weigh down investor sentiment, including concerns about persistent inflation, faster-than-expected US monetary tightening, lingering impacts of the Covid-19 pandemic, a greater-than-expected slowdown in the People’s Republic of China (PRC), and the protracted fallout from the Russian invasion of Ukraine.

The region’s bond market saw record-high issuance in the second quarter of this year, driven mostly by the PRC’s efforts to stimulate the economy. Regional bond stock rose to $22.9 trillion at the end of June.

Issuance in economies belonging to the Association of Southeast Asian Nation (ASEAN) rose 10.3 percent, expanding the bloc’s share of regional bond issuance to 17.5 percent.

Image credits: Mdvedwards | Dreamstime.com



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