ADB: Rising inflation boosts Philippines, East Asia bond markets

MANILA, Philippines — Government bond yields in the Philippines increased in the third quarter even as rising inflation concerns and the US Federal Reserve’s looming taper diminished financial conditions. 

This was the case for the bond market in emerging East Asian economies as well, which grew to 3.4% in the third quarter to $21.7 trillion.

In a report penned by the Asian Development Bank released Friday, the yields of local government bonds in the Philippines were found to have grown for all tenors between end-August and October 15, save for 1-year bonds. 

The largest increases were observed in 10-year bonds as it surged 64 basis points on average. 1-month to 6-month tenors inched 4 bps on average while the longer-term 20-year and 25-year tenor rose at an average of 5 bps. 

“The encouraging macroeconomic outlook and accommodative policy stances are supporting the region’s financial conditions. However, central banks in the region may find they need to be less accommodative to keep inflation in check and to keep in step with US monetary policy changes,” said ADB acting chief economist Joseph Zveglich, Jr.

That said, total local currency government bonds outstanding stood at P8.32 trillion at the end of the third quarter. This expansion of 6.2% quarter-on-quarter was steered by Treasury bonds and Bangko Sentral ng Pilipinas bills.

Aside from inflation and the Fed taper, the ADB said improved yields may be due to uncertainty in the country’s economic recovery, amid declining infections daily and an improved vaccine rollout. This meant some investors wanted premiums imposed considering the associated risks. “

For example, persistently high inflation might temper the recovery by discouraging consumer spending on the back of a weak labor market,” the report said. “In addition, while its vaccination rate is improving, the Philippines remained among the lowest in the region in terms of the percentage of the population vaccinated, making it vulnerable to economic setbacks.”

Government bonds remained king within the bond market of East Asian economies, as it expanded 3.9% from the preceding quarter to $13.6 trillion.