INFLATION. Bond yields surge as BSP sees inflation lingering into 2027

Highlights

• 7.2%: September headline inflation was the fastest pace since March 2023.
• 50 bps: The Monetary Board raised the policy rate by 50 bps to 5.5% on Oct. 22 to contain broadening price pressures.

The Setup

Headline inflation hit 7.2% in September, up 1.1 points from August and the seventh straight month above the BSP's 3% target. The BSP still expects inflation to average 6.1% this year, but it raised its 2027 forecast to 6% from 5.4%, signaling that it sees price pressures persisting well beyond this year. At the Oct. 27 auction, the Bureau of the Treasury raised only P21.775 billion against a P35-billion target as yields surged, with the reissued seven-year bonds averaging 7.737%, up 91.2 bps from the Aug. 25 award, and the reissued 10-year bonds averaging 8.189%. The BSP reference rate for the peso weakened to 63.991 per dollar on Oct. 28 from 62.603 on Sept. 28. In the session reported on Oct. 28, the PSEi fell 1.87% to 5,653.55 as concerns over the peso's decline weighed on sentiment.

Source: news article

Our Read

Our takeaway is that the BSP now sees inflation staying elevated into 2027, and the bond market is pricing in that persistence. The central bank cited El Niño and spillovers from the Middle East conflict, which has driven a global oil price shock with Brent at $116.24 a barrel on Oct. 27, and it left the door open to further tightening.

The peso's slide adds the risk of imported inflation, which the source identifies as a concern for the BSP. A weaker currency and a higher official inflation path help explain why investors were cautious about longer-tenored debt and why both bond tenors were only partially awarded.

What We're Watching

• The US Federal Reserve's decision this week, which policymakers have telegraphed as a hold.
• Further data due this week, which bond market players were waiting for.
• The Treasury's remaining October borrowing under its P418-billion domestic program.