The yield curve of fixed income market would likely to remain stable if the central bank decided to hold its rates steady, an executive of the Manulife Investment Management and Trust Corp. (MIMTC) opined last Monday.
However, if a surprise cut does happen, it could result in a flattening of the yield curve, MIMTC Head of Fixed Income Jean Olivia de Castro said. A yield curve that is less steep would encourage more demand for longer-dated bonds and support loan growth, De Castro added.
However, she said the flattening may also heighten sensitivity to the currency and food price risks.
‘Overall, the MB’s (Monetary Board) cautious approach reflects a desire to preserve policy flexibility and anchor financial stability amid lingering local and global uncertainties,’ de Castro said.
The policy-making MB of the Bangko Sentral ng Pilipinas (BSP) will meet on Thursday.
De Castro, however, said the MB is widely expected to hold its policy rate at 5 percent, balancing the recent return of inflation toward target with persistent upside risks from food supply shocks and peso volatility.
She advised fixed-income investors to have a dual approach, such as investing on short-term tenors for flexibility amid policy uncertainty, while selectively adding longer tenors to lock in at current yields.
‘With short-term yields at multi-year lows and long-term yields near 1-year lows, maintaining a defensive duration stance is advisable until inflation risks-especially from food and the currency-are better contained,’ de Castro said.
The country’s inflation rate is expected to return to the 2- to 4 percent target band defined by the BSP by the end of 2025, she said.
‘Upside risks remain, notably from sticky food prices due to supply shocks stemming from typhoons and the extended rice import ban. Additionally, potential peso weakness beyond the 58 levels could complicate the inflation outlook and recommend prudence in adjusting monetary policy. Against this backdrop, the BSP is expected to have one more rate cut before the end of the year,’ de Castro said.
She said persistent weakness of foreign direct investment may keep yields elevated on fixed income securities.
A recovery, meanwhile, could happen if infrastructure and reforms gain traction. This could enhance liquidity, lower long-term rates and improve the relative attractiveness of Philippine bonds, according to de Castro.