Yields on the Philippines‘ benchmark 10-year government bond have increased to the highest since the end of 2018, reflecting the country’s fixed-income market, amid global inflation fears, energy shocks and tighter financial conditions.
The jump is coming as global crude oil prices are heading towards $100/bbl, raising inflation risks for oil-importing economies. The conflict in the Middle East has increased worries around the supply of energy which may lead to soaring transportation, electricity and consumer prices in the Philippines.
The Philippine peso’s performance has also been negatively affected by rising interest rates in the U.S., the world’s interest rate benchmark, as well as the higher rates globally. The downward pressure on the currency may raise imported inflation, which may reduce the space for the Bangko Sentral ng Pilipinas (BSP) to try to cut interest rates aggressively if it needs to do so.
The government’s borrowing needs are also hurting the bond market. The rise in issuances to fund infrastructure and other public expenditures have increased the amount of government securities in circulation, and investors are seeking higher yields in the face of higher risk premiums in the region and worldwide.
This increase in the 10-year yield has ramifications that go beyond government debt markets. Increased sovereign borrowing costs may over time impact commercial lending rates, such as for mortgages, auto loans and corporate borrowing, which can push up borrowing costs for family businesses and households.
However, higher government bond yields can make Philippine fixed-income securities more appealing to investors due to the higher returns they can generate compared to times when bond yields were lower.
The latest action gives insights on the impact of external shocks on the Philippines’ financial situation. Investors will keep an eye out for further indications on bond yields’ direction from upcoming BSP policy decisions, oil prices, U.S. yields and currency movements as well as domestic borrowing requirements.
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