Rates & Bonds 7 MIN READ

Radar Report: Continue investing tactically

The central bank’s “prudent pause” in rate hikes has given investors the opportunity to recalibrate their bond portfolio strategy.

May 30, 2023By EA Aguirre

This article is exclusive to Metrobank preferred clients.

Log in your Wealth Manager account to get access to investment insights, bank views, and webinar videos.

Philippine inflation is slowing along with the rate hiking cycle of the Bangko Sentral ng Pilipinas (BSP). A rate cut is on the horizon.

For investors, this means it is wise to lock in long-term bonds now before rates trend lower by the end of the year. Consequently, there is value in shorter-tenor securities especially if they have maturities of less than a year.

You can check our full report here for our analysis and specific recommendations for 7- to 20-year bonds. You may call your relationship manager or investment specialist if you need more info.

EARL ANDREW “EA” AGUIRRE  is a Market Strategist at Metrobank’s Financial Markets Sector and has 10 years of experience in foreign exchange, fixed income securities, and derivatives sales. He has a Master’s in Business Administration from the Ateneo Graduate School of Business. His interests include regularly traveling to Japan and learning its language and culture.

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Rates & Bonds 2 MIN READ

Peso GS Weekly: Time to get long-term bonds

Given the recent reversal in yields of peso government securities, this creates an opportunity to start loading up on long-tenored bonds for the coming years.

May 30, 2023By Geraldine Wambangco

This article is exclusive to Metrobank preferred clients.

Log in your Wealth Manager account to get access to investment insights, bank views, and webinar videos.


It was a relatively muted week in the peso government securities (GS) market last week as local yields generally tracked the higher move in US Treasury yields.

The Bureau of the Treasury (BTr) fully awarded the reissuance of the 7-year Fixed Rate Treasury Note (FXTN) 7-69 at an average of 5.774% and a high of 5.850%, which were levels higher than initial market indications.

The poor auction reception, which registered the lowest bid-to-cover ratio year-to-date of only 1.23x, led to more defensiveness in the peso GS space. Overall, yields were higher for the week by around 10-20 basis points (bps), with long-term bonds seeing the biggest movement of around 15-20 bps.

FXTN 13-1 traded higher by around 19 bps to end the week at 6.01% despite closing the previous week at 5.82%, whereas FXTN 20-25 was higher by 15 bps and closed the week at 5.975%. Volume in the peso GS space was also noticeably lower, averaging only PHP 19 billion per day, with Friday’s trading session seeing the lowest volume at PHP 4.6 billion.

The BTr also released the June borrowing program, which includes issuances in the 5-, 6-, 9-, and 15-year ten

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Currencies 5 MIN READ

April forex recap: Mixed reactions on USD amid crises

The US dollar’s value remains to be in a roller coaster state after being battered by the collapse of several US banks, plus a debt ceiling crisis. Still, there are silver linings that highlight the demand for US dollar-denominated instruments, particularly US treasury bonds, as safe havens.

May 29, 2023By EA Aguirre

April 2023 was a generally weak month for the US dollar as it continued to be battered by a regional banking crisis that started in March with the collapse of Silicon Valley Bank (SVB). The tightening in bank credit conditions that followed had markets wondering whether the crisis was already doing the Federal Reserve’s job for it and if additional rate hikes were still necessary.

These sentiments grew stronger after the March 2023 Consumer Price Index (CPI) came out lower at 5% year-on-year versus 5.2% forecast. By mid-April, better than expected Q1 2023 earnings of the top US banks helped alleviate banking crisis fears and prop up the US dollar.

The currency continued to recover on still-high one-year US inflation expectations of 4.6% versus 3.7% forecast and was barely affected by news of First Republic Bank’s deposit outflows and stock sell off, which eventually led to its closure on May 1.

The Japanese yen (JPY) was the biggest loser in April, starting at 132.46, and then ending higher at 136.30 as the Bank of Japan (BOJ) made no changes to monetary policy at its April meeting. Markets saw the move as a dovish tilt from previous expectations of immediate hawkish changes when Governor Kazuo Ueda’s nomination was announced.

However, it seems that the BOJ is quietly laying the groundwork for a potential future policy shift. A review of past changes in monetary policy was announced at the meeting.

There were also some notable changes in rhetoric such as the removal of the central bank’s previous pledge to keep interest rates at “current or lower levels.”

Despite Q1 2023 Gross Domestic Product (GDP) underperforming at 1.3% versus 1.4% forecast, the Euro fared much better than its G3 counterparts on a combination of improved growth expectations, steadily easing inflation and consistently hawkish European Central Bank (ECB) rhetoric which it still open to rate hikes in 50-basis point (bp) increments.

But the ECB may be in a similar position to the Fed as markets have priced in only 1-2 further hikes in the next two meetings. We also wonder whether the EUR/USD exchange rate already reached its target upside at 1.1100 as overly bullish Euro positions started to take profit at those levels.

Pound sterling (GBP) remained the best performer last month as United Kingdom inflation in March remained in double digit territory at 10.1% versus 9.8% forecast, which highlighted the extended need for the Bank of England (BOE) to keep policy rates elevated.

Wage growth also remained strong as quarterly total average weekly earnings surprised to the upside at 5.9% versus 5.1% forecast. The desk continues to be slightly bullish on GBP/USD exchange rate as the BOE has to remain more hawkish to stamp out inflation while also trying to avoid a technical recession.

Despite initial expectations that an OPEC+ supply cut would cause oil prices to shoot up, prices remained stable in April, which caused the Canadian dollar (CAD) to weaken by as little as 0.18%. The currency pair seems to have established a near term bottom at the 1.3350/1.3400 region, similar to how oil has tapered off its decline at the USD 66-67 per barrel level. Given that the Bank of Canada (BOC) also paused its rate hikes earlier than the Fed, we still see opportunities for the US dollar to strengthen against its Canadian counterpart.

The Australian dollar and New Zealand dollar tracked lower metals prices as both seemed to track the move of copper futures in particular. Pessimistic views on China’s economy and decreasing demand for imported metals further reinforces the bearish views on Australian dollar (AUD) and New Zealand dollar (NZD). AUD was initially pressured by the Reserve Bank of Australia’s (RBA) decision to pause its policy rates at 3.6% but the currency pair was able to recover some losses as Australian Employment Change doubled expectations at 53,000 versus 20,000 forecast.

AUD ended lower by 0.91%. On the other hand, NZD weakened further by 1.34% as Q1 2023 CPI came out much lower at 6.7% year-on-year versus 7.1% forecast. Previously, New Zealand inflation had been stuck at 7.2% for both Q3 and Q4 2022.

Growing weakness in CNH

It has been months since China ended restrictive lockdowns and global markets have yet to see any spikes in significant demand, particularly the aforementioned metals that the country used to import from Australia and New Zealand. The offshore yuan (CNH) did not strengthen at all despite positive data in Q1 2023 GDP (4.5% versus 4% forecast), year-on-year March trade balance (USD 88.19 billion versus USD 39.20 billion forecast), year-to-date industrial production (3% versus 2.7% forecast), and unemployment (5.3% versus 5.5% forecast), as investors expected pre-pandemic-level figures.

To make matters worse, the People’s Bank of China (PBOC) signaled the possibility of rate cuts later in the year in order to further spur growth. This will continue to put pressure against the CNH, which will likely stay above the 7.0000 level.

The above forecasts are the foreign exchange traders’ personal opinions and may not reflect the official views of the bank.

The US dollar continues to be strong against its global peers even after First Republic Bank replaced SVB as the second largest bank closure in US history. Ironically, the risk off sentiment brought about by both the regional banking crisis and debt ceiling only further increased the demand for US treasury bonds as a safe haven investment.

Slight decreases in recent inflation figures also support expectations of high policy rates. The Fed is currently divided on whether to pause or hike rates once more in June but it will probably take signals of future rate cuts to cause the US dollar to weaken significantly.

EARL ANDREW “EA” AGUIRRE  is a Market Strategist at Metrobank’s Financial Markets Sector and has 10 years of experience in foreign exchange, fixed income securities, and derivatives sales. He has a Master’s in Business Administration from the Ateneo Graduate School of Business. His interests include regularly traveling to Japan and learning its language and culture.

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Investment Tips 2 MIN READ

Don’t miss out on these tactical GS trades 

If you followed our recommendation to take profit from long-term peso government securities (GS) last month, good for you. Now we believe it’s time to reinstate your positions with the upcoming auctions in June.

May 29, 2023By Patty Membrebe

This article is exclusive to Metrobank preferred clients.

Log in your Wealth Manager account to get access to investment insights, bank views, and webinar videos.

Good news: Our recommendation to take profit from long-term peso government securities last month has proven favorable to investors, as prices of peso government securities (GS) have cheapened in the past week, following the recent sell-off.

Even better news: As peso yields now trade higher by some 15 basis points (bps), we see a good opportunity to reinstate GS positions in the upcoming auctions in June, at more attractive entry levels.

The best part? We anticipate decent trading gains for investors who can hold for up to six months, given our clear view of falling peso interest rates in the near term.

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Equities 5 MIN READ

Stock Market Weekly: Relief rally seen amid possible deal on US debt ceiling

A deal about the US debt ceiling is on the horizon, which is good news for the local stock market this week. The MSCI rebalancing will also spur trading.

May 29, 2023By First Metro Securities Research

The Philippine Stock Exchange index (PSEi) closed lower by 2.02% (-134.35 points) week-on-week to 6,530.20 as market sentiment remained cautious due to prolonged discussions on the US debt ceiling.

Adding to investor concerns, Fitch Ratings put the United States’ debt on negative watch last Thursday, highlighting the lack of progress in debt limit discussions. On the domestic front, investors digested the April 2023 Balance of Payments (BoP) report, which revealed a swing from a surplus of USD 1.267 billion in March 2023 to a deficit of USD 148 million. However, the January-April BoP still showed a surplus of USD 3.31 billion compared to a surplus of USD 79 million during the same period last year.

The top index performer was San Miguel Corporation (SMC) (+2.2%), while index laggards were Converge (CNVRG) (-6.2%), LTG Group (LTG) (-6.0%), and PLDT (TEL) (-5.7%). The index breadth was negative with 1 gainer versus 27 losers. The average daily turnover value was PHP 4.0 billion. Foreigners were net buyers by PHP 2.4 billion.


We anticipate the market to rebound following the agreement in principle made between the White House and House Republicans to raise the US debt ceiling, thereby averting a default and mitigating the risk of a global economic crisis.

Key details of the deal include a two-year debt limit increase and a two-year appropriations agreement that maintains non-defense spending at approximately current levels. Additionally, we expect increased trading activity mid-week as the MSCI semi-annual rebalancing changes take effect as of the close of May 31, 2023 (Wednesday).


Resistance: 6,800

Support: 6,600 / 6,400

After failing to break above the 100-day moving average (MA) (~6,689), the PSEi pulled back and is now hovering below its 200-day MA (~6,542) as well. The market must break back above the 200-day MA to prevent the bears from further taking over. We believe that only once the PSEi breaks above 100-day MA/6,740/6,800, will a reversal of the market’s short-term downtrend occur.

Gradually accumulate once the PSEi trades back above 6,800.



Currently, BDO is trading within the PHP 135.00 – PHP 145.00 range. With BDO trading near the lower end of the range, it is optimal to accumulate at or near PHP 135.00 for a better risk-to-reward trade.

BDO posted a 1st quarter 2023 net income of PHP 16.5 billion (+41% y-oy) – in line with consensus but ahead of our estimates. We have revised our forecasts to reflect the strong performance in full year 2022, and so far in the 1st quarter of 2023. Benefitting from higher net interest margin (NIM), strong expansion in fee-based services, and continued normalization of credit costs on stable non-performing loans, or NPLs, we now forecast BDO can deliver 13.7%/13.7% return on equity (ROE) in full year 2023 and 2024 – closer to management’s mid-teens target ROE.

However, we believe these positives are already in the price. As for price action, BDO is one of the few index names trading above its key moving averages (50-day, 100- day, and 200-day). After three successive rallies, BDO seems to be consolidating anew above its recent breakout point, suggesting that another rally could occur. Accumulating once BDO pulls back to PHP 135.00 is advisable. Set stop limit orders below PHP 125.00 and take profit at around

PHP 155.5.

Bank of the Philippine Islands (BPI) — BUY ON BREAKOUT

BPI reported 1st quarter 2023 net income of PHP 12.1 billion (+52% y-o-y) – in line with consensus and ahead of our estimates, attributable to average asset base expansion, margin growth, and lower provisions.

We raised our target price for BPI to PHP 123.00. We have factored in the strong showing in BPI’s earnings from recent quarters, driven largely by the positive transmission of policy rates on net interest margins, double-digit loan growth (led by credit cards), robust fee income, stable cost-to-income ratio, and lower provisions.

As a result, we now expect the bank’s return on equity to reach 13.9% this year – close to the high of 14% in full-year 2016. As for the merger of BPI and Robinsons Bank, we see merits to the pending merger of the two banks, in view of BPI’s growing assets, deposits, and client base, with RBank having delivered above-industry loans and deposits CAGR in the last five years.

We also see synergies between BPI and Gokongwei group’s (through Robinsons Retail) products and services platforms – strengthening both companies’ positioning across the financials and retailing industries. Accumulating once BPI breaks above PHP 110.00 is advisable. Set stop limit orders below PHP 101.20 and take profit at around PHP 126.5. For long-term investors, our fundamental target price for BPI is PHP 123.00.

DigiPlus Interactive Corp. (PLUS) — BUY ON PULLBACKS

PLUS posted a net income of PHP 436.8 million in the 1st quarter of 2023, a turnaround from the PHP 223.1 million in net losses incurred in 1st quarter 2022, driven by strong topline growth from its retail games business.

PLUS’ consolidated revenues surged to PHP 4.2 billion (1st quarter 2022: PHP 752 million), amid the solid performance of its online platform, BingoPlus. The recent earnings outperformance brought PLUS’ share price to its highest since August 2019. As for the company’s plans this year, under retail, PLUS targets to open more physical sites in different areas, especially in the provincial regions.

PLUS is also looking into additional game offerings and gaming machine acquisitions to support its growing operations. The company plans to add new online games to increase revenue and player retention. Accumulating once PLUS pulls back to PHP 3.15/PHP 3.10 is advisable. Set cut loss below PHP 2.90. Take profit at around PHP 3.62/PHP 3.70.


Thursday, June 1, 2023
– US Initial Jobless Claims as of May 27, 2023
– US S&P Global preliminary manufacturing PMI for May 2023 (consensus estimate: 48.5; April 2023: 48.5)
– PH S&P Global preliminary manufacturing PMI for May 2023 (April 2023: 51.4)

Friday, June 2, 2023
– US Change in Nonfarm Payrolls for May 2023 (consensus estimate: 188k; April 2023: 253k).
– US Unemployment rate for May 2023 (consensus estimate: 3.5%; April 2023: 3.4%).

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Investment Tips 4 MIN READ

Unraveling the debt ceiling drama: What to do with your bond portfolio? 

The continuing impasse in debt ceiling talks puts pressure on high-yield bonds, potentially leading investors to demand higher yields for higher-risk bonds. However, a barbell strategy for investment-grade bonds, especially those with higher ratings, looks promising.

May 25, 2023By Anna Isabelle “Bea” Lejano

In our previous article, the possible consequences of the US debt ceiling drama to the global economy, as well as to the Philippines, were laid out.

With about a week away from the reported x-date, or the date by which the US would be in default of its obligations, it should be interesting to see how the investment-grade (IG) and high-yield (HY) markets performed before and after a similar debt ceiling drama in the past.

An attempt will be made in this article with the help of Metrobank’s research partner, CreditSights, who published a report titled US Strategy: Debt Ceiling Defense on May 9, 2023. This may aid you in making decisions about your bond portfolio.

But let’s talk about bond spreads first. Bond spreads represent the difference in yields between riskier bonds, like HY or IG bonds, and safer investments, like US Treasuries. Spread widening occurs during periods of market uncertainty or economic distress, when investors demand higher yields for riskier bonds, resulting in wider spreads.

Revisiting 2011

It might be worthwhile to take a little trip down memory lane to 2011 when a similar debt ceiling drama occurred, reminiscent of the current situation. Back then, the US Congress postponed raising the debt ceiling until the last minute, leading to a not-so-pleasant consequence: a credit rating downgrade by S&P.

In the buildup to the 2011 debt ceiling deadline, the spreads for IG bonds initially widened three months before the x-date. However, as the deadline drew near, the pace of widening took a breather, gradually tightening up instead. (See table below.)

CreditSights found that IG spreads performed slightly worse in the past three months ending the 2nd week of May 2023, increasing by 28 basis points (bps) as against only 21 bps back in 2011.

This was primarily driven by lower-rated bonds, namely those rated A and BBB, due to concerns about the banking system and a potential recession this year, as opposed to 2011 when spreads for higher-rated bonds, such as AA, were affected the most.

In both instances, long-term IG bonds showed relative resilience compared to short-term and medium-term bonds.

In the high-yield market, spreads have also widened by 82 bps in the past three months ending the 2nd week of May, but less than the 103 bps in 2011. The recent widening has been more apparent in short-term bonds.

Among different credit ratings, lower-rated CCC bonds performed worse both in 2011 and recently. However, the performance of higher-rated bonds such as B and BB was relatively better than in 2011.

2023 debt ceiling crunch

With the deadline fast approaching, there’s a big possibility that negotiations on the debt ceiling might again stretch until the last minute. In such a scenario, there’s a chance for HY bond spreads, especially for lower-rated CCC bonds, to widen further.

This could have an impact on HY bonds across various tenors. However, it’s worth noting that IG bond spreads, particularly for higher-rated bonds, may fare relatively better in comparison. CreditSights said there is a possibility that IG spreads could demonstrate stronger performance amid a wider risk-off sentiment.

In the current IG market landscape, there’s an interesting phenomenon known as a flat yield curve. This means that the interest rates for short- and long-term IG bonds are pretty similar, like they’re on the same playing field. This situation opens up a potential opportunity for investors who want to shield themselves from volatility.

CreditSights said, given the current situation of flat yield curves and increased pressure on short-term spreads, it is advisable to be cautiously optimistic about shorter-term IG maturities compared to mid-term ones.

The credit research firm also suggested that investors seeking protection from debt ceiling volatility may find a barbell strategy beneficial. That means focusing on the two extreme ends of the maturities of IG bonds to strike a balance between higher yielding long-term bonds and the more flexible and liquid short-term bonds.

However, no two debt ceiling dramas are alike. The current economic landscape and market dynamics differ from those of 2011. It’s quite tricky to predict how the debt ceiling crisis will affect the market and the economy.

At the end of the day, you must still pay close attention to how the debt ceiling discussions go. You may also consult your investment advisor to craft a strategy that suits your needs.

ANNA ISABELLE “BEA” LEJANO  is a Research & Business Analytics Officer at Metrobank, in charge of the bank’s research on the macroeconomy and the banking industry. She obtained her bachelor’s degree in Business Economics from the University of the Philippines School of Economics and is currently taking up her Master’s in Economics degree at the Ateneo de Manila University. She cannot function without coffee.

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Investment Tips 4 MIN READ

Are REITs becoming appealing again? 

With the recent rate hike pause of the central bank, investors may want to revisit real estate investment trusts (REITs).

May 24, 2023By EA Aguirre

With the Bangko Sentral ng Pilipinas (BSP) pausing its series of interest rate hikes recently, households and businesses alike can breathe a sigh of relief. That’s because the cost of borrowing from banks are likely to stop becoming more expensive as well.

The property sector, in particular, was at the mercy of high interest rates as the combination of elevated inflation and expensive financing discouraged new leases and expansion projects. But with a new monetary policy easing cycle on the horizon, it may be time for investors to consider increasing exposure to the property sector in their portfolios through REITs.

A REIT, or Real Estate Investment Trust, is a stock corporation which owns and operates income-generating real estate, such as office buildings, industrial plants, shopping malls, and more. (See our previous article, Finding the right time to invest in REITs.)

Investors may purchase shares in these REITs, which differ from other shares of stock as REITs are mandated by Philippine law to distribute 90% of their earnings in the form of dividends. Imagine reaping the benefits of investing in real estate without actually having to acquire and manage a property.

While REITs are already well-entrenched in financial markets around the world, the Philippine Stock Exchange welcomed its very first one when Ayala Land-sponsored AREIT, Inc. had its initial public offering (IPO) on August 13, 2020. Since then, the number of REITs in the country has grown to eight, with SM Prime Holdings, Inc. planning to enter in the second half of 2023.

2022 saw significant economic recovery from the pandemic which helped revitalize earnings in the property sector. Office space occupancy was at around 80% as employees returned to their offices, while increased mobility and revenge spending drew shoppers to the malls.

REITs were able to ride and essentially hedge against high inflation through rent adjustments. Even as the Philippines’ Consumer Price Index (CPI) averaged 5.8% year-on-year in 2022, REITs still declared dividends that were above or close to that figure.

Chart 1. Philippine REITs 2022 Dividend Yields

REITs can be a hedge against inflation. (*322-day annualized dividend yield, **198-day annualized dividend yield)

The Philippines’ CPI has since come down to 6.6% in April 2023 from a high of 8.7% in January 2023. However, despite the downward trend in headline inflation, the core CPI, which excludes volatile oil and food prices, has remained stubbornly elevated at 7.9%.

This is primarily due to second-round effects – businesses increase the prices of their goods and services in anticipation of present and future cost increases. With consumption spending still strong, businesses will likely keep their prices high, which should also allow properties to continue charging higher rent for longer.

Chart 2. Philippine Headline Consumer Price Index vs. Core Consumer Price Index

While headline inflation has begun to ease since the beginning of the year, core inflation has not.

While policy interest rates are still elevated, we expect a new BSP easing cycle to begin with a 25-basis-point cut in December 2023. Lower interest rates will encourage greater spending by households and businesses.

For the property sector, this means building and acquiring more commercial real estate to meet the needs of expanding businesses, which can potentially broaden sources of rental income. The risk to this view is greater adoption of work-from-home (WFH) arrangements and the exit of Philippine Offshore Gaming Operators (POGOs).

But despite these risks, there will continue to be demand for office space as the economy normalizes and as businesses shift to more hybrid work arrangements which balance both work from home and the office.

An easing cycle and improving business conditions may also bring in renewed optimism in the equities, which can help pull REIT valuations up. Five of the eight REITs’ share prices are down year-to-date, while DDMPR and MREIT are relatively flat.

This could be an opportunity to enter the market and slowly ladder in excess funds. Only CREIT has shown double-digit growth, likely due to its portfolio concentrated on non-cyclical renewable energy producers.

Chart 3. Philippine REITs year-to-date returns as of 17 May 2023

In summary, we believe that there is an opportunity to invest in REITs, considering that borrowing costs may be headed lower in the near future and commercial real estate occupancy will improve as the economy further normalizes.

As mentioned, REITs can be an alternative source of regular cash flow because of its dividends. And because most REIT share prices are down year-to-date, this could be an opportunity to accumulate shares in REITs.

However, please be aware that REITs are still equity instruments. They are meant for investors with aggressive risk appetites and long-term investment horizons.

It is still advisable to consult investment professionals.

(If you are a Metrobank client, you may contact your relationship manager or investment specialist to learn more.)

EARL ANDREW “EA” AGUIRRE  is a Market Strategist at Metrobank’s Financial Markets Sector and has 10 years of experience in foreign exchange, fixed income securities, and derivatives sales. He has a Master’s in Business Administration from the Ateneo Graduate School of Business. His interests include regularly traveling to Japan and learning its language and culture.

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Rates & Bonds 2 MIN READ

Peso GS Weekly: Continue to be nimble 

It is better to load up in the upcoming auctions. For those not in a rush for long-tenored peso bonds, there’s still value in short-dated ones.

May 24, 2023By Geraldine Wambangco

This article is exclusive to Metrobank preferred clients.

Log in your Wealth Manager account to get access to investment insights, bank views, and webinar videos.


Better buying interest was seen in the peso government securities (GS) market early last week as players digested headlines of a potential pause in the Bangko Sentral ng Pilipinas’ (BSP) monetary tightening cycle amid slowing inflation seen in the past few months.

Risk appetite was further fueled by the strength of the 13-year auction for the reissuance of Fixed Rate Treasury Note (FXTN) 13-1, which was awarded at an average of 5.854% and a high of 5.874%. The 13-year bond also garnered strong interest in the secondary market as it traded by as much as 15 basis points (bps) lower from its auction average.

Other medium- to long-term peso GS followed suit as investors tried to pick up long-dated bonds. The 20-year benchmark peso yield was taken down to the 5.80% level as there was a lack of bond supply in this tenor bucket.

The BSP was then seen keeping the key policy rate unchanged, or just in-line with expectations for the much-awaited Monetary Board meeting, and lowered the inflation forecast for the year to 5.5% vs. the previous 6.0%.

To end the week, the peso GS market finally tracked the move higher in US Treasur

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Economy 5 MIN READ

Is the next crisis waiting to happen in the commercial real estate sector?

There are estimates that around USD 1.5 trillion of commercial real estate debt in the US is maturing over the next three years. Investors are worried, but we think it’s manageable.

May 24, 2023By Anna Isabelle “Bea” Lejano and Geraldine Wambangco

Concerns about the commercial real estate (CRE) sector moved to the forefront following the fall of Silicon Valley Bank (SVB) and the mini banking crisis that ensued thereafter.

Why? Well, the work-from-home arrangements that led to high vacancies raised questions about the future of US office space. One of the scarier numbers being thrown around is the amount of CRE debt that needs to be refinanced over the immediate term, with the most common refrain citing USD 1.5 trillion maturing over the next three years.

Smaller US banks remain meaningful players in commercial real estate lending. Banks with less than USD 5 billion in assets still comprise about 30% of holdings, with another 21% held by banks with USD 5-25 billion in assets.

Are CRE concerns valid?

Despite the seemingly dire numbers, we believe the CRE concerns are overblown.

As our research partner, CreditSights, has reported, banks do not normally participate in fixed-rate lending for CRE, as around 81% of CRE loans under the coverage of CreditSights have variable interest rates. This lessens the risk of unexpected price adjustments when the loan matures.

Moreover, longer-term trends indicate that CRE loan exposures as a percentage of the banking system’s tangible equity are still at multi-decade lows, much lower than what we saw before the economic downturns in the late 1980s and mid-2000s, indicating that banks are not taking on too much risk in the CRE sector.

Ratios to take note of

The ratio of outstanding commercial mortgages to GDP can be a proxy for CRE demand. The historical behavior of this measure shows that during financial crises, the ratio considerably deviated from its long-term trend.

What is interesting is that there has not been a surge in debt levels that would lead to a significant deviation for more than 10 years. The brief spike in 2020 stemmed from the COVID-19 pandemic, but generally, there has not been a persistent trend of heightened borrowing.

When comparing bank lending for CRE to the Commercial Property Price Index, which reflects asset valuations, we observe that valuations have outpaced loan growth since the financial crisis. This suggests that there is a more careful and balanced approach to leverage and loan-to-value (LTV) ratios in the CRE market.

Better prospects this time around

Banks have substantially scaled back their lending for construction and development projects since the 2008 crisis. These loans have not significantly increased since then. Note that these development loans had high default rates compared to other types of CRE loans and were a major driver behind the losses that banks sustained during the financial crisis.

While construction lending has been relatively flat since 2017, stabilized CRE lending, or loans for CRE properties that are already operating and generating consistent income, has been gradually growing, slightly exceeding the growth of total bank lending.

The sector that attained significant expansion is multifamily properties, such as apartments. Note that multifamily lending is reinforced by strong demand, particularly because people need shelter and these multifamily properties are a necessity, combined with other factors such as affordability.

Dismantling concerns

Banks’ exposure to office properties is relatively minor compared to their total loan portfolios. Banks also have strong reserve levels, and they hold senior positions in the capital structures of these properties, which diminishes possible risks.

It is important to note that larger national banks usually have a bigger share of lending in industrial and office assets, while smaller banks play a more prominent role in lending in the retail and hotel markets.

Hence, recent concerns about office assets should not be taken to reflect the overall health of the broader CRE market.

Moreover, banks only have a limited amount of non-agency Commercial Mortgage-backed Securities, or CMBS securities, which are higher-risk securities with no government backing, in their holdings. This further reduces their exposure to potential risks.

Although smaller US banks have significant exposure to CRE lending, they also tend to be more biased toward lower-risk owner-occupied CRE loans, making up 40-50% of holdings for banks with assets of less than USD 5 billion.

Recent concerns about the CRE sector seem exaggerated, as there has been a significant decrease in banks’ exposure to higher-risk construction and development loans, a relatively low level of leverage in the CRE market, and other changes in the banks’ overall CRE lending approach.

The total CRE market has been more stable compared to past periods of financial crises, indicating that banks are in a much better position now to handle potential risks.

Challenges and opportunities

While we believe the CRE risk is not systemic, challenges remain for the smallest banks amid tight lending conditions and high interest rates. Despite the disconnect with market pricing, the US Federal Reserve has explicitly stated it does not expect policy rate cuts this year to deal with recessionary risks, namely, the looming credit crunch, the debt ceiling standoff, and the climate hazard from El Niño.

Thus, in a risk-off environment, there are opportunities in the fixed-income market as we think the Fed has reached the peak of its tightening cycle. Capital gains can be realized when the real pivot, i.e., policy rate cut, takes place.

The perceived economic uncertainty warrants a preference for high-quality assets like government securities and investment grade (IG) credits over equities. A new easing cycle on the horizon, granted that inflationary pressures ease, could then present opportunities for the equities market.

For now, it is prudent to be conservative and switch to higher-yielding assets as inflation remains elevated, and wait until the US Fed and the Bangko Sentral ng Pilipinas see a compelling reason to cut interest rates.

ANNA ISABELLE “BEA” LEJANO  is a Research & Business Analytics Officer at Metrobank, in charge of the bank’s research on the macroeconomy and the banking industry. She obtained her bachelor’s degree in Business Economics from the University of the Philippines School of Economics and is currently taking up her Master’s in Economics degree at the Ateneo de Manila University. She cannot function without coffee.

GERALDINE WAMBANGCO is a Financial Markets Analyst at the Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. She provides research and investment insights to high-net-worth clients. She is also a recent graduate of the bank’s Financial Markets Sector Training Program (FMSTP). She holds a Master’s in Industrial Economics (cum laude) from the University of Asia and the Pacific (UA&P). She takes a liking to history, astronomy, and Korean pop music.

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Economy 3 MIN READ

Caution: Watch out for El Niño

Inflation has been going down. Dry spells and droughts, however, are seen looming in some areas of the Philippines due to El Niño in the 3rd quarter. Could this mean higher prices of goods down the road?

May 22, 2023By Ina Judith Calabio

Just as the country is nearing the end of summer days and saying hello to cooler months, dry spells and droughts are seen looming in some areas of the Philippines due to El Niño.

According to PAGASA, recent conditions and model forecasts indicate an 80% probability of an El Niño occurring within June to August. This is seen to persist until the first quarter of 2024.

El Niño is caused by the warming of the sea surface temperature in the Pacific that can affect air and sea currents. This then results in reduced rainfall which could lead to droughts and stronger typhoons later.

Why should we be concerned?

While not a new phenomenon in the Philippines, the past El Niños have resulted in dips in agricultural production, whether weak or strong.

The last El Niño to hit the Philippines was the one in 2015-2016, which lasted for approximately 18 months. According to the Food and Agriculture Organization (FAO), 1.48 million metric tons of crops, including rice, corn, cassava, banana, and rubber were lost, resulting in a total of USD 325 million worth of damage and production losses. This also affected 413,456 farming households which needed support to start anew in the next cropping season.

Hot sea water temperatures in the 2015-2016 El Niño also led to a decline in fisheries production, particularly in the aquaculture sector. Mindanao also had power supply shortages because the operations of hydroelectric dams were hampered by low water levels.

Rice and corn production typically suffers during El Niño episodes. Source: PSA, World Bank Report

El Niño typically occurs every two to seven years, with La Niña and neutral conditions in between. Based on records, the world’s hottest year so far was 2016, and there is a high possibility of reaching new record high temperatures in 2023, according to climate analysts.

What now?

The looming El Niño will likely hit corn and rice’s main cropping seasons and subsequent harvest seasons.

El Niño, which is expected to be felt in the country from July 2023 to March 2024, could hit corn and rice production at their critical months. Source: USDA

While importing might be the easy solution, major rice producing countries are most likely to face similar challenges. For instance, Thailand, the world’s second-biggest rice exporter, is considering reducing its cropping season to just one instead of the usual two seasons this year due to the feared impacts of El Niño.

Food inflation, while moderating, remains elevated, and a shortfall in rice or agricultural production in general might prompt a new round of price increases.

Strategies have been laid down to mitigate the impacts of the looming El Niño with high priority given to water supply infrastructure and early water and power conservation efforts. This, it is hoped, could alleviate production dips, and help the country endure the heat.

INA JUDITH CALABIO is a Research & Business Analytics Officer at Metrobank in charge of the bank’s research on industries. She loves OPM and you’ll occasionally find her at the front row at the gigs of her favorite bands.

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