Market Summary

Yield Movements

The yield curve of local currency (LCY) government bonds in the Philippines steepened between 31 August and 30 October. Yields on bonds with 1-month, 3-month, and 2-year maturities dropped on an average of 7 basis points (bps) while the remaining tenors all saw increases in their yields, with larger advances in 20-year and 25-year maturities at 45 bps and 29 bps, respectively. The yield declines at the shorter-end of the curve were due largely to the accommodative monetary policy stance of the Bangko Sentral ng Pilipinas (BSP) and the inflation rate remaining subdued. On the other hand, yield increases at the longer-end of the curve stem from expectations that inflation may pick up with the further reopening of the economy and on gloomy economic growth forecasts.

Size and Composition

Total LCY bond outstanding in the Philippines reached PHP8,136.4 billion (USD167.8 billion) at the end of September on growth of 8.8% quarter-on-quarter (q-o-q) and 21.5% year-on-year. The bond market expansion was supported by the government segment, particularly with the issuance of the PHP516.3 billion Retail Treasury Bonds, and by the corporate segment on the back of more bond sales during the third quarter. The government and corporate bond markets grew 10.1% q-o-q and 3.8% q-o-q, respectively, and comprised 79.9% and 21.1% of the LCY bond market.

Policy, Institutional and Regulatory Developments

The BSP started issuing BSP securities on 18 September as an additional instrument to manage liquidity in the financial system. According to the BSP, this initiative will help the central bank shift to more market-based monetary operations and support the implementation of monetary policy under the interest rate corridor framework. The addition of BSP securities to the supply of risk-free financial instruments in the banking system could help in the development of the LCY bond market. The issuance of the securities is allowed under the New Central Bank Act that was signed in February 2019.