Philippine Bonds Still Look Pricey on All These Metrics

Philippine bonds have taken a battering this year but they still look expensive on a number of metrics.

Even after climbing for the past two months, the nation’s yields offer a relatively narrow spread over the central bank’s policy rate and also U.S. Treasuries, according to a Bloomberg analysis looking at historical averages. At the same time, inflation is comparatively high and the peso appears somewhat richly valued.

Philippine Bonds Still Look Pricey on All These Metrics

Philippine sovereign bonds have handed investors a loss of 6.3% this year in dollar terms, the worst result in emerging Asia after Thailand and Malaysia. The benchmark 10-year yield jumped to 4.49% this week, from as low as 2.63% in August. While much of the poor performance has been due to the global bond selloff, unappealing local metrics have contributed too.

Here are four ways in which the nation’s bonds are still expensive:

1. Despite the surge in local yields, the spread between the nation’s 10-year notes and the central bank’s overnight borrowing rate is only 1.1 standard deviations from its five-year average. Compare that with Malaysia, where the difference is 3.3. A wider spread allows for a bigger potential decline in yields if they revert to their mean once the economy recovers and fiscal situation improves. In addition, having higher yields relative to funding rates also helps entice local banks to buy government debt.

2. The premium of Philippine 10-year yields over similar-maturity Treasuries is close to its five-year average. The z-score -- which measures standard deviations from the mean -- is just 0.1. In comparison, Malaysia is 0.4 and Thailand is 0.6, increasing the attractiveness of their bonds.

3. Inflation in the Philippines is also high versus its peers. February’s reading of 4.7% is 1.2 standard deviations above the five-year mean. The same reading for Indonesia is 2.1 standard deviations below. Even though economists forecast Philippine inflation will slow to 3.6% by year-end, it’s unlikely it will ease enough to erase the gap between the country and its counterparts.

4. The peso also appears relatively overvalued, having a real effective exchange rate that is 3.7% above its five-year average. Based on the same metric, the currencies of Indonesia and Malaysia are both undervalued, the rupiah by 2.4% and the ringgit by 2.7%.

Key Bond MetricsPhilippinesThailandMalaysiaIndonesia
10Y spread over policy rate (z-score)
10Y spread over Treasuries (z-score)
Inflation (z-score)1.2-1.6-0.6-2.1
Real effective exchange rate (%)3.72.5-2.7-2.4

Strategists also appear bearish.

Philippine 10-year yields are expected to end the year at 5.10%, in line with the increase in global yields, said Duncan Tan, a rates strategist at DBS Bank Ltd. in Singapore. At the same time, the central bank may start its next rate-hike cycle sooner than its regional peers due to the negative real policy rate, he said.

When an investment has taken a beating, there will usually come a time when losses have built up enough to create some value and it becomes an attractive target again. For the Philippine bond market, it doesn’t appear as if that stage has been reached just yet.

What to Watch

  • Malaysia will publish February trade figures on Monday after the trade balance dropped to a five-month low in January. FTSE Russell will announce its twice-a-year review of equity and fixed-income indexes on the same day. Malaysia is on a watchlist for possible exclusion from the World Government Bond Index
  • Indonesia will conduct a 30 trillion rupiah ($2.1 billion) debt sale on Tuesday, and announce inflation data on Thursday
  • Thailand will release balance-of-payment figures on Wednesday, while on Thursday, Markit will publish Southeast Asian PMI numbers

Note: Marcus Wong is an EM macro strategist who writes for Bloomberg. The observations he makes are his own and not intended as investment advice

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