Macro Overview

The US economy faces a mix of conflicting forces, making it difficult to assess its true momentum. Despite this uncertainty, a clear trend has emerged: economic activity is slowing while inflationary pressure begins to rise again. The slowdown is driven by factors such as upcoming tariffs, high interest rates, reduced immigration, and ongoing policy uncertainty. These factors weigh on employment, business investment, and consumer spending. The impact is most felt by lower- and middle-income households and small businesses. This leaves the economy increasingly dependent on large corporations and affluent consumers—a fragile foundation for sustained growth. Inflation in June reflected this complexity, with tariffs pushing up prices on a range of consumer goods, although these increases were partially offset by declines in travel and vehicle costs.

Meanwhile, the Federal Reserve (the Fed) remains divided, with some policymakers advocating for steady rates and others open to cuts if labor market conditions weaken. However, as of July 30, the Fed has decided to maintain key policy rates unchanged at 4.25%–4.50%. Market players now eye future guidance from Fed Chair Jerome Powell on future rate cuts, if any. Political pressure reinforces the Fed’s commitment to independence, which may contribute to rising long-term yields.

US President Donald Trump has kept himself busy with reaching global trade deals with trading partners. Prior to the August 1 deadline, the US made only nine deals in 120 days, particularly with Japan, the European Union, the United Kingdom, Philippines, Vietnam, Indonesia, South Korea, Thailand, and Cambodia. On the deadline date, Trump managed to secure last-minute deals with Canada, Brazil, India, Taiwan, and Switzerland. Talks with China, the world’s second largest economy, is still ongoing, as both sovereigns fail to come to a mutual agreement. Additionally, Trump granted Mexico a 90-day reprieve from higher tariffs to allow time to negotiate a broader trade pact.

USD Strategy

We gradually shift our preference toward the belly of the curve, particularly in the 5- to 10-year space, given recent market moves and developments. In the past couple of months, the market has mostly traded in a 25-basis point range despite various tariff headlines. However, with Trump ramping up the pressure on Fed Chair Powell to cut rates, we note that the risk-reward is now more favorable for extending to longer-dated bonds. We still believe that Fed cuts will naturally lead to a steepening of the yield curve, which will make investors more cautious in investing in 10-year papers, particularly when 10-year US Treasuries trade closer to 4.50%. We therefore advocate a tactical approach to managing long-duration exposure, including staggered order placements to mitigate the impact of ongoing market volatility.

PHP Strategy

We maintain a cautious and nimble stance in adding exposure to peso government securities (GS), as the local bond market remains sensitive to external pressure. The recent rise in US Treasury yields and the uptick in the USD/PHP exchange rate have introduced volatility, prompting a more tactical approach. Additionally, the Bureau of the Treasury (BTr) has announced its intention to offer Retail Treasury Bonds (RTBs) maturing in 2030. We favor this issuance, as the current economic environment supports lower yields in the medium term. The Bangko Sentral ng Pilipinas (BSP) maintains a dovish stance, supported by lower-than-expected inflation figures. Metrobank’s current house view anticipates two more rate cuts by year-end, followed by two additional cuts in 2026. Additionally, the upcoming jumbo maturities of nearly PHP 800 billion in the coming months are expected to support GS yields, as investors redeploy their proceeds into the market – potentially boosting demand for the new RTB.

Looking ahead, we remain constructive on the local GS market and plan to add positions on any significant uptick in yields or through the BTr’s upcoming auctions. Entry timing will be strategically guided by developments across key fronts: statements from the BTr regarding debt management plans, the BSP’s monetary policy signals, and global factors—particularly shifts in Fed rhetoric or escalations in Trump’s trade policies. We are particularly focused on extending duration into the 10–25-year segment of the curve, which offers greater potential for price appreciation should local yields move meaningfully lower.