Macro Overview

The US economy enters 2026 with moderating but still resilient growth, as the effects of restrictive monetary policy, trade actions, and labor‑supply constraints increasingly interact. Recent data confirm that economic momentum has cooled, particularly in employment, even as headline GDP growth surprised to the upside in late 2025. US labor market dynamics are the clearest sign of deceleration. Payroll growth slowed sharply through the second half of 2025, averaging near stall speed, yet the unemployment rate has risen only modestly to around 4.4%, as weaker labor demand has been offset by slowing labor supply due to reduced immigration and declining participation rates. Against this backdrop, the US Federal Reserve has shifted to a cautious holding pattern. Policymakers remain divided, but the balance of risks now favors patience rather than urgency. Market pricing and recent sell‑side revisions suggest that rate cuts in early 2026 are increasingly unlikely, with several institutions now projecting no easing this year and some even pushing the next policy move into 2027, contingent on clearer labor‑market deterioration. As for the Philippine economy, GDP growth is expected to recover gradually in 2026, following a weak 2025 marked by subdued infrastructure spending, soft private investment, and confidence shocks linked to public‑sector governance issues. Favorable base effects such as the election ban in 2025, and potential additional easing from the Bangko Sentral ng Pilipinas (BSP) all point to improving growth for the Philippines. Inflation has also become a key positive catalyst. Headline inflation fell sharply in 2025 and remains well within the BSP’s 2–4% target range, with 2026 projections averaging around 3.0%–3.2%. However, investment activity is lagging, reflecting lingering uncertainty related to governance reforms, delayed infrastructure projects, and cautious private‑sector sentiment. Externally, the Philippines remains exposed to global trade and financial conditions.

USD Strategy

A. Locking in yield Ahead of more rate cuts and curve steepening, with the Fed likely to continue cutting its policy rate, we think maturities should be rolled over while yields remain elevated. Given the combination of Fed easing expectations and heavier long-end supply, we prefer to remain invested in short-dated to intermediate tenors. The 2- to 5-year tenor bucket continues to offer favorable risk-adjusted returns in a steepening curve environment, avoiding unnecessary duration risk while maintaining flexibility. B. Opportunistic primary market engagement Expected AI- and tech-related issuance should create opportunities to selectively participate in primary markets, particularly where relative value is compelling. Focus will remain on credits with strong fundamentals, improving credit rating trajectories, and clear capital expenditure narratives. C. Geographic and sector diversification While US corporates remain a core focus given a resilient macro backdrop and upgraded GDP expectations, diversification remains critical. Select Asia corporate credits—particularly in Korea, India, and Japan—stand to benefit from AI-linked demand and offer attractive relative value. In sovereigns, Morocco and Oman remain upgrade candidates, while KSA continues to offer good value and remains under-owned.

PHP Strategy

A. Maintain a steepening bias while being patient on duration Our current curve positioning remains in the belly of the curve, especially in the 5-year sector, consistent with our steepening bias. At current yield levels, we are not inclined to add duration aggressively, preferring instead to await better entry points. Upcoming government security auctions are likely to create such opportunities, particularly as size risks begin to reassert themselves. For the first 10-year auction of the year, we estimate issuance could reach at least PHP 100 billion. While market conditions can still evolve materially, we believe that sheer supply size alone has the potential to induce further steepening, reinforcing our preference to stay tactical in extending duration. B. Focus on liquidity for long-end positioning For longer tenors, we continue to highlight FXTNs 10-69, 10-72, and 20-23, reflecting a desire to keep viable options open for long-term investors. Historically, FXTN 10-72 demonstrated strong relative value toward the latter part of last year, while FXTN 20-23 benefited from the absence of 15-year auctions, supporting its performance. These securities remain our preferred choices due to their liquidity within their respective tenor buckets. Over time, however, we anticipate adding 7-year FXTN 20-20 to our recommended list, as this is expected to become the next focal point for reissuance in upcoming auctions, enhancing its benchmark status.