Philippine Markets Newsletter

MONDAY MACRO: This indicator’s quick rise hints at economic recovery in the near term, though mostly for countries with an effective vaccine rollout

March 22, 2021

This indicator has been rising in most countries, which is normally a signal of economic recovery. However, the speed at which this rate is rising has some analysts concerned, especially for countries lagging behind in vaccine rollouts.

Though the near-doubling of this indicator hints at a repeat of the 2013 taper tantrum effects, the Philippines’ improved economic and credit fundamentals should placate concerns of another market crash in the near term.

Philippine Markets Daily:
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Treasury bond yields are the returns one gets from investing in government debt obligations. As we talked about in our January 25th Macro Report, these yields are an important indicator of bondholder sentiment and they give us insight into expectations for economic growth or recovery.

Investors who become more risk-averse and fear losing money in the stock market generally turn to bond investments, particularly government bonds, because of their low risk of default.

When demand for these bonds increases, the government responds by increasing the prices of the bonds, as the law of supply and demand goes. However, when bond prices rise, the returns that investors get also decline. Even at lower returns, this investment alternative is still more attractive than the higher-risk equities.

So any time we see bond prices continue to rise, we can get a sense of the growing concern about a country’s economic recovery as investor sentiment turns pessimistic.

Conversely, low demand in the bond market signals that investors are willing to take more risks in the equity markets. To respond to this competition for capital, the government needs to lower bond prices, leading to higher bond yields.

Therefore, rising bond yields generally signal investor confidence in an economic recovery. The expectations for faster recovery in the US, thanks to the efficient vaccine rollout, is one of the reasons bond yields rose in February in most Southeast Asian countries.

However, rising bond yields can also be caused by higher inflation expectations. In this case, investors are demanding higher yields to compensate for the declining value of their money due to inflation.

These expectations for higher inflation are the reason why Philippine bond yields rose the fastest in the region from the end of February to the mid of March.

That is not to say that Philippine bond yields are not affected by economic conditions or expectations in the US. On the contrary, since the US is one of our major trading partners, whatever happens to their economy and the US dollar has a ripple effect on our economy. That’s one of the reasons we closely monitor US interest rates and bond yields.

Combined with the sentiment that investing in the US government is effectively riskless, the 10-year U.S. Treasury yield expanded from 0.9% at the end of 2020 to its highest level in over a year at 1.7% last Thursday.

The last time the US recorded growth like this was in 2013. At that time, the US Federal Reserve announced it was going to slowly taper their monthly purchases of treasury bonds. The bond markets reacted negatively since this meant demand for bonds would fall.

From April 2013 to May 2013, 10-Year U.S. Treasuries jumped from 1.7% to 2.1%, before expanding further to 2.8% in August 2013, and to a peak of 3.0% in December 2013.

The higher interest rates in the US resulted in funds flowing out of emerging markets and into the US, which caused the PSE Index to drop by more than 20% from May to August 2013. Meanwhile, the Philippine 3-month bond yields jumped from 0.4% in April 2013 to 2.2% in May 2013. With a 489.2% monthly change, this was the steepest change we’ve seen in the past decade.

At present, Philippine treasury yields will continue to face upward pressure, especially as more countries step up their vaccine rollout program and people become more optimistic that the end of the pandemic is near.

As of March 2021, 10-year bond yields have risen from 3.9% in February 2021 to 4.7%, while 3-month bond yields have slightly increased from 0.9% to 1.2%.

Meanwhile, the treasury yield spread between 10-year bond yields and 3-month bond yields widened from 2.9% in February 2021 to 3.4% in March 2021.

While the Philippines is a little behind on vaccine rollout, we don’t think the stock market will suffer any more than it has. We do still expect market volatility because of the rising cases in the country, and any market rally may be short-lived.

However, we maintain that the Philippine economy’s fundamentals remain stable and that credit fundamentals remain safe. So even as the US treasury yields rise, it’s unlikely that any flight of capital from emerging markets to the US will cause abrupt declines in the PSEi.

In addition, the credit fundamentals of the top Philippine corporations still indicate a strong capability to pay their financial obligations in the next five years despite declining aggregate Uniform earnings.

About the Philippine Market Daily
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim
Research Director
Philippine Markets Daily
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