Macro View

• The big debate for 2025 is how aggressive US president-elect Donald Trump will implement tariff policy and its impact on the US economy, following a Republican sweep in Congress at the last elections. Currently our official house view is an end-2025 Federal Funds rate of 3.75%, but the Trading Desk believes the bond market would trade at range of 3.75%-4.25%. The base case for a market view of a 3.75% terminal rate is if Trump has a softer stance on inflation and tariff policies. This would be supported by the US Federal Reserve (Fed)’s continued monetary easing as inflation reaches its 2% target, along with the possibility that Trump will use campaign promises on tariffs as a negotiation tool rather than being implemented as policy. Still, there is a possibility of an aggressive Trump tariff policy, leading to faster inflation and a higher terminal rate.
• In the event that Trump aggressively implements his campaign promises, there is a probable case that this would lead to a negative supply shock as import prices increase and immigration flows slow. However, the drag on growth would be more than offset by a boost in demand from increased fiscal spending and tax cuts. This might result in stronger economic growth compared to other so-called G10 countries, sticky inflation, and a higher terminal rate.
• In terms of fixed-income assets, the Trading Desk believes that the 2- to 5-year tenor is the recommended investment in terms of risk-reward ratio. Although there is a possibility that 10-year yields could go lower, especially if slower US economic growth pans out, we still believe that long-end US Treasury (UST) yields could remain elevated due to possible increased fiscal spending and rising UST supply under the Trump presidency, which could also spill over onto sovereign and corporate bonds.

• We remain positive on bonds within the 5Y tenor, as that is where we think clients would benefit the most in the event of rate cuts by the Fed. We only recommend that clients only tactically position in the 10Y bonds given that there is room for steepening in the back end of the curve given the tightness (Spread between the 10-year UST and 2-year UST is at 31.00 basis points, compared to a historical average of 48.18 basis points). Clients may enter at 10-year UST at 4.55% given the projected rate cuts by the Fed. Although, we are considering the possibility that the 10-year UST may reach 4.75%-5.00% if Trump enacted his promises during the campaign.
• We want to focus on investment grade bonds, which has higher (5.00%-5.40%) compared to typical Asian and US investment grade bonds that yield about 4.70%-5.00%. Starting with the sovereign bonds, we favor the Philippines, Indonesia and Oman for extra pick up in yield. For state-owned enterprises, we favor Indonesian state-oil company Pertamina Persero PT and Indonesian state banks. We also favor corporate issuers like SM Investments Corp. and Aboitiz Equity Ventures Inc.

Peso Bond Strategy

• The Bureau of Treasury is expected to issue bonds totaling PHP 365 billion in the first quarter. They will be issuing bonds in the 3-, 5-, 7-, 10-, 20-, and 25-year tenor buckets. Given that the majority of the allocation is in the 5- to 25-year tenor bucket, the Trading Desk believes that the supply pressure in the longer tenors may cause the yield curve to steepen.
• Given the supply pressure in longer-dated securities, the Trading Desk recommends placing investments in the front-end to the belly of the curve (3-7 years). Moreover, the government securities curve has been trading relatively flat from a relative value standpoint – with the 10-year benchmark (10-72) seen trading with little to no term premium over belly bond benchmarks (RTB 5-18 and 20-17) – bolstering the attractiveness of these front-dated securities. For clients who want to load up on bonds in the 10- to 20-year bucket, they may be able to enter at better levels through primary auctions instead of buying in the secondary market.
• We are optimistic about some Philippine corporate bonds for the additional yield over government benchmark bonds. We prefer the 2- to 3-year bonds of Energy Development Corporation (EDC) and Filinvest Land (FLI). EDC is a leading geothermal energy producer in the Philippines, while FLI is a leading real estate developer specializing in residential, office, and retail properties.