Philippine Debt-Central bank move sparks bond rally

By Carmel Crimmins

MANILA, March 14 (Reuters) - Philippine debt yields dropped
around 20 basis points in heavy trading on Friday after the
central bank effectively pumped funds into the market by
cutting rates on its Special Deposit Accounts (SDAs) and
removing half the available tenures.

"The rally we saw yesterday is continuing for the day,"
said one Manila-based dealer. "We are seeing a lot of shifting
of liquidity."

Trading was concentrated in maturities between one year and
five years with yields dropping as much as 35 basis points in
the one year paper and an average of around 20 bp's in the
other tenures.

Banks had locked in up to 600 billion pesos ($14 billion)
in the SDAs, which offered a maximum tenure of six months and
relatively attractive returns, and the central bank's move on
Thursday saw investors scrambling for alternatives.

"People are looking for tenures of 5 years down, anything
with a yield of between 5.5-6 percent," said another dealer.

Trading volumes were over 17 billion pesos by 0330 GMT,
already above the average daily volume of around 11.6 billion
pesos with 4 billion pesos exchanged in after-hours dealing on
Thursday.

The central bank scrapped the two-month, three-month and
six-month maturities on its SDAs and cut the rates on the
1-week, 2-week and 1-month maturities on the SDAs in an
effective easing of monetary policy.

Around 300 billion pesos were locked up in the cancelled
maturities and dealers expect the inflows to support prices
over the next few months.

Equity markets are also expected to benefit from
yield-seeking investors but the main index .PSI was down
around 1.37 percent on Friday.

A further drop in debt yields could be capped by fears of
rising inflation, which encouraged the central bank to keep its
headline policy rates unchanged. [PHCBIR=ECI]

The overnight borrowing rate was left at at 5.0 percent, the
lowest since May 1992, and the lending rate at 7.0 percent.

Annual inflation hit a 16-month high of 5.4 percent in
February amid rising food and fuel costs and price pressures
are expected to peak in the second quarter.

"Next week, we will probably consolidate a bit, move
sideways. We have probably dropped 30 basis points for the
month to date we will probably settle there for a while and
reassess the market," said the first bond dealer.

Philippine markets will finish trading on Wednesday next
week ahead of the Easter holidays, encouraging banks to take
profits and potentially limiting the drop in yields.

Average best bids and done deals in the secondary market*:

BEST BIDS DONE DEALS

March 14 March 13 March 14 March 13

(in percent)
three-month <PH3MT=RR> 4.6288 4.6327 4.5000
4.5000
six-month <PH6MT=RR> 5.6365 5.6892 5.5000
5.6150
one-year <PH1YT=RR> 5.9250 6.1846 5.7500
6.1000
two-year <PH2YT=RR> 6.3065 6.3304 5.8160
6.0242
three-year <PH3YT=RR> 6.3788 6.4054 6.0087
6.2850
four-year <PH4YT=RR> 6.4577 6.5673 6.0541
6.2191
five-year <PH5YT=RR> 6.6808 6.7169 6.2824
6.4307
seven-year <PH7YT=RR> 6.8692 6.9885 6.6000
6.6250
10-year <PH10YT=RR> 7.1073 7.1608 7.0000
7.0650
20-year <PH20YT=RR> 8.5288 8.6019 8.2500
8.5000
25-year <PH25YT=RR> 8.6885 8.7019 8.6000 8.6000

*Values based on fixing by the Philippine Dealing and
Exchange Corp (PDEX) as of 11:30 a.m.

(Reporting by Carmel Crimmins; Editing by Neil Fullick)