LOCAL bond yields are likely close to their peak as investors see the Bangko Sentral ng Pilipinas (BSP) nearing the end of its tightening cycle, but the market remains positioned for a pause rather than an easing, according to Manulife Investments Philippines.
In a commentary, Jean Olivia De Castro, head of fixed income, said the yield curve is steepening as trading remains concentrated at the short end, anchored by the risk of another rate hike by monetary authorities.
At the same time, longer-dated yields have been edging higher as investors demand a greater risk premium to compensate for uncertainties tied to inflation and foreign exchange.
‘In my viewpoint. this signals that yields are likely near their peak versus early in the hiking phase. However, it’s important to note that the market is not pricing a pivot or an easing cycle, just a pause from the BSP,’ De Castro said.
The central bank is widely expected to deliver a 25-basis-point rate hike this Thursday, with BSP Governor Eli M. Remolona Jr. signaling earlier that they can be less aggressive in monetary tightening as economic growth loses momentum.
The central bank projects inflation at 3.1 percent by 2028, returning close to the target range of 2 to 4 percent, but short-term yields have started to move lower.
‘The front end is looking through the BSP’s long glide path and focusing on near-term catalysts,’ De Castro said.
With growth softening while inflation risks remain tilted to the upside, De Castro said the BSP’s priority remains keeping inflation expectations and the peso anchored.
‘I believe that this view can hold as long as inflation keeps surprising lower and FX/oil shocks stay contained,’ De Castro said. However, it is important to note that it is fragile: with upside risks of higher oil prices, El Niño and second-round inflation effects still present.’
As the BSP balances price stability with economic growth, bond investors should view this environment to continue to support shorter-dated securities because of their relatively high yields, while long-term bonds may remain choppy until inflation risks clearly ease, De Castro said.
With this, investors may favor shorter-dated bonds if El Niño and elevated commodity prices cause inflation to persist for longer, she added.
Shorter maturities also give investors greater flexibility to reinvest their proceeds if yields rise further, although this strategy also exposes them to reinvestment risk, she noted.
‘A prudent strategy is to maintain a diversified maturity profile, spreading investments across tenors and extending into longer-dated bonds only when the additional yield sufficiently compensates for the higher inflation and duration risk,’ De Castro said.