HONG KONG, Dec. 8 (Reuters) — Philippine government peso bonds, buoyed recently by a sea of cash from redemptions and remittances, are likely to suffer a reverse in coming weeks as inflows slow and inflation fears take hold, analysts say.
Remittances from overseas Filipino workers are expected to total more than $10 billion this year, a fifth higher than in 2004, and that has helped transform the peso into Asia’s best-performing currency this year.
That has shielded the Philippines from high oil prices to some extent and encouraged bond investors looking to reinvest money from redemptions, especially as debt issues may be scarce.
"There are many treasury bonds maturing in December which may not find a home because the Bureau of Treasury might cancel all bond auctions in December 2005," said Alexander Gilles, a research analyst with Manila-based BPI Asset Management.
Data from the Bureau of Treasury shows about
R18.4 billion ($342 million) of treasury bills and bonds are to be redeemed in December after R58.2 billion in October and November.
Last week the government cancelled all Treasury bill auctions in December saying it had enough funds for this year after borrowing already carried out, and there is talk that treasury bond auctions may not be held this month, either.
That is good news for a government that spends a third of its budget on servicing its massive $72 billion debt, equivalent to 80 percent of gross domestic product.
Anticipating a squeeze, investors have gone on a buying spree, compressing yields on the benchmark five-year treasury bonds to 9.438 percent this week, the lowest since 1995, according to analysts at AsiaBondsOnline. They were trading around 9.9/9.6 percent on Thursday.
But overseas remittances will slow after the usual holiday season spike and oil prices may well rise during the northern hemisphere winter, while an increase in the sales tax rate to 12 percent from 10 percent could add to inflation pressures.
"One of the risks that players may be ignoring now is monetary policy. If you look at the minutes, you can see they are hawkish — they are worried about inflation," said Edward Lee, fixed income strategist with Standard Chartered Bank, Singapore.
The central bank expects inflation to gather pace and reach a peak in the first quarter of 2006 when the sales tax rate is raised, but Lee expects the authorities to begin raising official interest rates ahead of price increases.
He forecasts a 25-basispoint increase in December, another in the first quarter of 2006 and one more in the second quarter.
The central bank, which has raised rates three times this year by a total of 75 basis points, has an overnight borrowing rate of 7.50 percent and a lending rate of 9.75 percent, the highest in nearly four years.
"The drop in remittances may put pressure on the peso and the central bank may tighten rates to defend the currency. We may see the five-year yield rising to 10.5 percent by January," said a Manila-based bond fund manager.
But further out, some analysts expect yields on Philippine bonds, which have fallen by over 300 basis points this year in the five-year segment according to AsiaBondsOnline, to attract foreign investors once more.
"Once we get back to around 11 percent, foreign investors will be keen to go long then, rather than right now," said Lee Boon Keng, a strategist at DBS Bank, Singapore.
