The Philippine bond market is approaching with caution as 10-year government bond yields remain high, driven by volatility from the ongoing Middle East conflict. Despite attractive returns, investors are wary of a prolonged period of elevated rates, especially if the Bangko Sentral ng Pilipinas (BSP) signals further tightening, according to Manulife Investment Management.
In a market commentary, Jean de Castro, head of fixed income at Manulife IM, noted that the 10-year government bond yield at 6.6 percent reflects a market perception that the macroeconomic backdrop remains risky but not worsening, with oil uncertainty as the dominant risk. The stability of long-end yields suggests investors have confidence in the BSP's policy credibility and expect the central bank to act to contain second-round inflation and support growth, offsetting inflation fears.
The BSP recently raised its benchmark rate by 25 basis points to 4.5 percent in response to inflation spikes tied to the Middle East war's energy shock—the first rate hike since October 2023. De Castro indicated that additional measured hikes are possible if oil price pressures persist.
"For the Philippine economy, this means tighter financial conditions ahead—higher borrowing costs and a more cautious credit cycle—while also supporting 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 expect a series of modest rate hikes. Amid this tightening, de Castro advised investors to focus on regular interest payments rather than volatile price gains. She noted that current conditions offer a better entry point for high-quality peso government bonds and conservative fixed-income funds, but near-term volatility from inflation, oil, and foreign exchange could push yields higher and create mark-to-market losses, especially for longer-duration funds.