Financial Blog

Interest Rates Markets: April Review

After 3 straight months of heavy losses, U.S. Treasury Bonds finally had a winning month for the year in April. US 10-year notes which closed at 1.73% in the 1st quarter of 2021 regained some composure and ended at 1.628% as of April 30. The 10 bps move is a token gain if you consider the 70-80 bps rise in the 1st 3 months of 2021. Nonetheless, the trend last March could still be signs of consolidation. The fact stands that economic data released in the US reflected what Bond traders have been pricing in since the start of 2021. US GDP, CPI, Retail Sales, and Jobs reports have shown stellar numbers beating analysts’ estimates and these indicated the strong reflation*-recovery which justified the upward trend in yields in the 1st quarter. Despite this solid economic performance, US Bond rates, however, continued to trend lower after hitting YTD highs last March, which could then be interpreted as a sustained corrective move since the reflation-recovery story for the US (and globally) remains intact.

Invest Terms:

Reflation is the act of stimulating the economy by increasing the money supply or by reducing taxes, seeking to bring the economy back up to the long-term trend, following a dip in the business cycle. It is the opposite of disinflation, which seeks to return the economy back down to the long-term trend. To relate reflation in this report, it is the stimulation of economic growth from policies pursued by the government to counter or address the deflation scenario or negative GDP growth which we experienced from 2020.

PHP Local Bonds: A flatter curve

Outlook for May

The Bond market is not out of the woods yet. Inflation is now dependent on global commodities’ trends and remains the biggest risk for rates to move either way. Food prices have seen stability in the past 2 months after the government addressed supply issues on pork and after the weather provided a better harvesting environment for our agricultural farmers and fishermen. Global Crude Oil prices, which have also consolidated after the 8-10 month rise brought about by the “Reflation Trade,” remains the major wildcard to affect our inflation trend as we are largely importing this commodity.

The recent inflation number released for May was at 4.5% vs the 4.7% survey. This marks the 2nd straight month that the CPI print was lower than market expectations. The recent lockdown could have dampened demand and eased CPI pressures. With stability in food prices and lower global crude prices, we may see inflation stabilize further in the next few months. However, a more stable inflation environment may not result in a rally in the Bond markets but it should influence increased buying interest, especially on any up move in yields.

Peso Bonds have seen modest returns for April as well. On an MoM basis, the Peso Bond Fund gained .37% while the MMF .09%. The recovery is seen to claw back slowly as yields are still at the higher end of the range on a YTD. As the struggle for direction continues in the Bond Market, accruals would provide good returns for the time being.