ADB: Government bond yields to weaken

MANILA, Philippines — Yields on government bonds will remain weak as investors continue to seek safe holdings amid the economic uncertainties caused by the COVID-19 pandemic, the Asian Development Bank (ADB) said.

In its latest Asian Bond Monitor, the Manila-based multilateral bank said the abundant liquidity in the market, combined with risk aversion and the accommodative policy stance of the Bangko Sentral ng Pilipinas (BSP) would remain a drag on yields.

ADB noted that yields of local currency (LCY) government bonds fell for all tenors between June 15 and Aug. 15. Those with shorter maturities of one month up to one year dropped the most, with an average decline of 71 basis points (bps).

Yields for securities with tenors of 10 up to 25 years dropped an average of 64 bps.

Relatively smaller yield declines, averaging 37 bps, were seen for securities with maturities of two up to seven years.

“The downward bias of yield movement remains, reflecting a flight to safety amid a weak economic outlook and uncertainty posed by the coronavirus disease pandemic, as well as abundant liquidity in the market as the Bangko Sentral ng Pilipinas (BSP) has been accommodative in its policy stance through rate and reserve requirement cuts to support the economy,” the report noted.

“With the pandemic ongoing, risk aversion will persist, resulting in higher buying interest for government securities and lower rates. Broader yield declines at the short-end of the curve indicate investors’ preference for short-dated securities as they are on the lookout for market leads.”

The local currency bond market expanded to P7.477 trillion in the second quarter, up by 5.2 percent quarter-on-quarter and by 11.5 percent year-on-year. This expansion was driven by the growth in government bonds which comprised 79 percent of the market, offsetting the contraction in government bonds.

Outstanding government bonds reached P5.90-4 trillion in end-June 2020, a growth of 6.8 percent quarter-on-quarter and 11.6 percent year-on-year.

The investor landscape for LCY government bonds in June was also changed from a year earlier. Contractual savings and tax-exempt institutions were the largest investors in  government bonds ending the second quarter, the ADB said.

This investor group overtook banks and investment houses as the largest investor group, whose market share declined to 36.2 percent from 43.9 percent during the review period.

Amid the pandemic, the country still possesses favorable credit ratings.

In May, Standard and Poor’s Global (S&P) maintained the Philippines’ sovereign credit rating at BBB+ with a stable outlook on expectations that the economy would bounce back strongly in 2021 after a contraction this year and continue to achieve above-average growth over the medium term.

In June, the Japan Credit Rating Agency upgraded the Philippines’ sovereign credit rating by a notch to A– from BBB+ but also adjusted the outlook to stable from positive, citing prospects for the sustainability of growth.

While the COVID-19 pandemic impaired the economy with the imposition of lockdown measures, the credit rating agency believes the downturn will be limited because of strong economic fundamentals, and a resilient external position.