Philippine bonds supported by favorable demand-supply dynamics

Philippine bonds may be rescued from a bout of underperformance by rising foreign demand in tandem with lower borrowings from the government.

The share of Philippine peso government bonds owned by foreigners has more than tripled to 6.03% as of August from 2021, according to the government, as overseas buyers bought bonds ahead of potential inclusion into JPMorgan Chase & Co.’s benchmark EM gauge. These inflows are set to continue as supply drops.

The country’s assets have had a rough stretch amid a rebound in inflation, less dovish central-bank signals and a weaker peso. Investors saw a loss of 0.7% on Philippine bonds in dollar terms in the three months through September, trailing all Southeast Asian peers, according to a Bloomberg index. Corruption allegations against the government triggered global equity outflows.

The bonds should perform well in the coming months amid favorable “supply dynamics” as the government front-loaded majority of its 2025 borrowings, said Shivank Sehgal, a fixed income investment analyst at Aberdeen Investments. Supply is expected to drop in the final quarter by 52% from the previous period, according to data from the Bureau of the Treasury.

Philippine local-currency bonds may get a weighting of 1% in the JPMorgan GBI-EM Global Diversified Index, JPMorgan said last month. That level would attract a passive allocation of roughly $2.5 billion to $3 billion, Aberdeen’s Sehgal estimated.

Demand has been relatively robust at recent auctions. A 10-year sale on Sept. 16 received a bid-to-cover of 3.09 times, which is above the six auction average cover of 2.60 times.

A P507 billion ($8.7 billion) sale of retail bonds in August — compared with the average auction size of P20 billion to P30 billion — leaves the Treasury comfortably funded, Goldman Sachs Group Inc. strategists Danny Suwanapruti and Andrew Tilton wrote in a note on Sept. 21.

The strategists have a long call on hedged five-year peso government bonds, currently around 5.87%, with a target price of 5.25%. — Bloomberg