PHP continues to underperform on rising political concerns among foreign investors

The Philippines peso has underperformed in comparison to its peers in the recent months. Part of this reflects increasing political concerns among foreign investors. There was also a spike in the 5Y credit default swap (CDS) spread to 117 basis points, from 84 bps in early September.

Philippines government bonds (PHgov) bonds are expensive. While 2Y and 10Y yields have drifted higher since September, the selloff in PHgov bonds can be expected to go further. Domestic and external conditions have become unfavorable for bonds. With inflation and oil prices edging up, accommodative monetary policy by Bangko Sentral ng Pilipinas (BSP) is nearing an end. Moreover, the trade balance has deteriorated while the global environment has become less supportive of bonds, DBS reported.

As the distortion from low oil prices dissipates going into 2017, CPI inflation should average 2.6 percent next year, up from a projected 1.6 percent this year. Coupled with the anticipated upward pressure from global rates, the higher inflation trajectory is likely to prompt the BSP to tighten its policy stance.

Meanwhile, major central banks around the world are recognizing the limits of monetary policy. With taper a consideration for the European Central Bank (ECB) and the Bank of Japan (BOJ) over the coming quarters, longer-term developed market yields are already heading higher.

Against this backdrop, the market is likely to be more discerning on fundamentals. Inflation and rate hike risks are not adequately priced into the market. Couched in an environment of rising developed market interest rates, there is considerable room for higher PHgov yields.