Debt-yields seen higher on expected inflation


Posted at Jun 30 2008 02:57 PM | Updated as of Jun 30 2008 10:57 PM


MANILA - Philippine debt yields are expected to rise this week on expectations that annual inflation will hit double digits in June, but high liquidity in the market could temper the impact on shorter term debt, traders said.

Traders said yields on medium to longer tenors were expected to edge 10-15 basis points higher ahead of June inflation data  due on Friday.

"Inflation will be double digits for sure," said a trader from a local bank, referring to the annual rise in the month. "I am looking at 10.5 to 11 percent."

Inflation may peak at 10-11 percent in the third quarter after rising to a near three-year high of 9.6 percent in May before easing back, central bank Governor Amando Tetangco has said.

Earlier this month, the central bank raised benchmark interest rates by 25 basis points, the first increase in nearly three years.

Tetangco said earlier the economy was resilient enough to accommodate further rate hikes to contain the rise in consumer prices, signalling a possible quarter point increase next month.

The central bank holds its next rate-setting meeting on July 17.

Meanwhile, yields on shorter term debt of up to three years were likely to get support from funds flowing into the bond market as investors pull out of the central bank's short-term deposit facility, traders said.

"I think the rates on the three-year paper and below continue to benefit from SDA (special deposit account) maturities," the trader said.

The central bank has closed three longer-term tenors of the SDA and lowered rates on the remaining shorter-term maturities, encouraging banks to buy state short-term debt.

"Liquidity is definitely in the system because of maturities and people would not want to invest in the stock market, so the safest form of investment right now is short-term government securities," the trader said.

The government also plans to sell P7 billion ($156 million)  of 2013 bonds at 0500 GMT (1 p.m.) on Tuesday. It was originally sold as a seven-year bond in 2006 and currently has a remaining life of four years and eight months.

Traders expect the debt to fetch an average rate of 8.75 percent to 8.875 percent, up from the 8.495 percent average rate at the last successful auction on June 3.