Bond yields hold near 6-mth low; policy eyed

Reuters

Posted at Jul 27 2011 03:18 PM | Updated as of Jul 27 2011 11:18 PM

BSP expected to hold rates

HONG KONG - Philippine bond yields held near six-month lows on Wednesday as market players took a breather a day before a central bank rate decision where it is expected to hold rates.

Twelve of 15 economists polled by Reuters expect the Bangko Sentral ng Pilipinas (BSP) to keep policy rates steady at 4.5% after it kept rates unchanged at a review in June. A majority though expect a one percentage point increase in banks' reserve requirements.

Three-year yields held around 4.31%, within striking distance of a six-month low of 4.24%hit on Monday. On the far end of the curve, ten year debt stabilized at a January low of 6.27% after a sharp drop.

Bond yields have fallen sharply this month with much of the drop focused on the medium part of the yield curve as the rising peso, expectations of a rate pause and hopes of lesser borrowing in the coming months encouraged investors to extend duration.

While the central bank is expected to resume its rate hike campaign later in the year, with one more rate increase widely seen, traders are betting on more peso gains in the near term to counter inflationary pressures.

The peso has strengthened by nearly 4% so far this year with much of its gains chalked up in recent sessions. Standard Chartered Bank expects more gains as it believes real money funds are underexposed to the Philippines and short-dollar/peso positioning have been modest.

Bonds between three and ten-year maturities are in heavy demand as extreme short-dated bonds and bills are still trading below the central bank's main policy rate, rendering them unattractive to some investors, traders said.

"The belly of the curve is in demand and buying should pick up even if the central bank signals a pause tomorrow," said one trader at a Manila-based bank.

In funding markets, three-month dollars in Singapore was broadly unchanged at 0.25523%, much below a peak of more than 0.31% hit in February.