Local bond market still cautious on higher-for-longer yields

The Philippine bond market is still treading carefully as 10-year government bond yields remain due to volatility from the Middle East war. Yet, investors appear to be banking on the central bank’s policy credibility, Manulife Investment Management said.

In a market commentary, Manulife said that although bond yields are attractive due to higher returns, investors remain cautious of a higher-for-longer rate environment. This, especially if the Bangko Sentral ng Pilipinas (BSP) signals further tightening.

“With the 10-year government bond at 6.6 percent, it spells that the market thinks the macro backdrop is still risk-heavy but not snowballing at this time with oil uncertainty remaining the dominant risk,” said Jean de Castro, head of fixed income for Manulife Investment.

”The fact that long-end yields are generally holding steady suggests investors see policy credibility and the likelihood that the BSP will act to help contain second‑round inflation and growth softness, offsetting inflation fears,” de Castro added.

The BSP on Thursday raised its benchmark interest rate by a quarter percentage point to 4.5 percent. This was in response to a surge in inflation driven by the Middle East war’s energy shock. It was the first rate hike since October 2023.

According to de Castro, it is possible for the BSP to implement additional measured hikes if the oil shock pressures persist.

“For the Philippine economy, this means tighter financial conditions ahead—higher borrowing costs and a more cautious credit cycle—while also providing some support to currency stability and helping prevent the inflation shock from becoming more persistent,” de Castro added.

BSP Governor Eli Remolona Jr. told Bloomberg that the market might be expecting a “succession of modest rate hikes.”

Amid this tighter financial environment, de Castro said investors have the opportunity to see improved income through relying on regular interest payments that volatile price gains.

“For investors adding exposure now, this is a better entry point for high-quality peso government bonds and conservative fixed-income funds, but the near-term environment still argues for staying disciplined because inflation/oil and FX-driven volatility can quickly push yields higher and create mark-to-market losses, especially in longer-duration funds,” she said.