Financial Blog

In our previous write-up, Back to Basics: The Case for MMF, we mentioned that 2022 was a memorable year for all the wrong reasons, and it could not be more true for the bond market. In an unprecedented move last year, we saw the fastest pace of rate hikes since the 80s as Central Banks globally wrestled with the lingering inflation problem.

Various analysts see last year’s movements in the financial markets as self-inflicted, with the Federal Reserve (Fed) and most Central Banks in the world keeping rates too low for too long that they had to ratchet up rate hikes at a very rapid pace. The Fed raised rates by 450bps (4.25%-4.50%) in 2022 with the Philippine Central Bank following suit and hiked policy rates by 350 bps (5.50%). Secondary rates shot up with the US 10Y note hitting a high of 8.25%, the highest level it has seen since the Great Financial Crisis of 2008.

As the markets continue to feel the effects of the massive hikes in 2022, one may wonder if 2023 is the year that the financial markets can finally turn the corner and provide some relief to investors especially in the fixed income space. If it is any indication of what’s to come, the first month of this year provides an Encouraging Start for bond investors.

2023 Playbook: Is it 2019 all over again?

It wasn’t that long ago when bonds were the asset class of choice. In fact, back in 2019 and 2020, we saw double digit returns for fixed income bond funds. The year 2020, though can be attributed to a pandemic-induced economy, wherein it was necessary for Central Banks to artificially lower interest rates in order to combat the pandemic. On the other hand, during 2019, we saw a more constructive move, where rates dropped significantly that can be attributed to two notable factors — lower inflation and BSP policy rate cuts.

Which leads us to everyone’s question in mind now: Is the current landscape in 2023 like that of 2019?

While no one knows for certain at this point, there are certain similarities with this year’s narrative to that of 2019, in the sense that, the general outlook for 2023 is for inflation to taper down. Both the US and Philippine inflation remains elevated with a range of 7 – 8%, but are poised to move lower by the 2^nd half of 2023 as the markets now can feel the dampening effects of the rapid rate increases implemented last year, and at the same time, the cycle  of  base effects make its impact.

Though the Fed is still  in a more hawkish tone, the BSP is slowly turning dovish in comparison. Governor Medalla indicated that the BSP can stop at two more hikes this year (total of 50bps) anchoring on the view that local inflation can fall as low as 2 – 4.0% by the 4^th quarter. In addition, the BSP is considering cutting Reserve Requirement Ratio (RRR) this year as early as the 2^nd quarter, which would generate an additional Php 180 billion of liquidity in the market.

Yes, the current narrative is similar to 2019 but this year offers more risks on the upside with the Ukraine and Russia War still ongoing, as well as the China reopening story.

The consensus for this year is that both the Fed and the BSP will still unlikely pivot this year but keep rates unchanged. Going back to 2019, both the Fed and the BSP started easing measures by the 2^nd quarter which resulted to a massive bull run for bonds (300-350 bps total).

This year remains in question, but perhaps we can refer to the years the 2018 and 2022 as a starting point on what to expect this year. It was in the year 2018 when we saw inflation fears peak in the month of October, consequently with the RPGB 12Y hitting a high of 8%. Looking back in October-November of 2022, the current RPGB 12Y also hit a level of 8% on heightened rate hike fears.

The pivot may not come sooner as it did in 2019, but like the former, we may have seen rates peak already given that both the Fed and the BSP are expected to end their tightening cycle this year.

2023 looks encouraging for Bond Investors

The SB Peso Bond Fund and Dollar Bond Fund generated 4.53% and 2.16% returns, respectively, in the first month of the year as we saw bond rates drop quickly to start the year on improving market sentiments as well as positive inflation outlook. Seeing a repeat of the 2019 bond rally remains uncertain but coming from the two years of negative returns from bond investments, we are off to a good and encouraging start. There’s an old saying that “Time in the market is more important than timing the market”, and holding on to this saying could benefit bond investors this year in a good way.

To learn more about our Money Market UITFs, you may go to:

SB Peso Bond fund: https://www.securitybank.com/personal/investments/unit-investment-trust-funds/sb-peso-bond-fund/