MktsFocUs: Trimming duration exposure

MktsFocUs: Trimming duration exposure


UnionBank Publication

UnionBank Publication

20 Oct 2020, 16:10 — 8 min read

BVAL rates forecast ranges: 5yr 2.685% - 2.865% 10 yr: 2.922% - 3.012%
Pay short duration/Neutral on the curve’s belly/Receive long end on dips

Week ahead (Oct 12-16): Curbing duration exposure amid excess liquidity in the system as gleaned from recent auction results for government bonds and term deposit facilities, may sustain this week’s biddish sentiment. Shorter duration exposure can be attributed to sustained preference for liquid assets during the crisis period rather than higher inflation expectations. Until sellers’ volume recede, the buy-on-dips strategy may prevail.

Previous week’s recap (Oct 5-9): Local CPI print came out as expected prompting market participants to take profits resulting in yields up by an average of 2-3 bps. Ahead of the 3yr bond auction last Tuesday, pruning of bond positions prevailed. The auction generated strong market interest with a hefty bid-cover ratio of 3.8x. However, there was selling pressure on the curve’s belly particularly on the liquid RTB (5-13) as the market’s mood turned sour following the BTR’s announcement of a Php15bn tap facility after the auction. RTB’s yield drifted up to 2.65% during mid-week (previous session’s close: 2.615%). Preference to take profits/lighten up on RTB exposure persisted towards end-week. Limiting duration exposure seems to be an emerging theme.

USDPHP forecast range: 48.30 – 48.60
Tactical sell USD/Long-term underweight PHP

Week ahead: The range of 48.30-60 is expected this week with support from data releases on the Aug PH trade balance (survey: -US$2bn/UBP:-US$1.5bn) and Aug OFW remittances (UBP:-0.8%YoY). A monthly trade shortfall of US$2bn or less due to slumping imports with fading export weakness, would ease any pressure on USDPHP from lacklustre remittances. As US markets appear to be more at ease with a ‘blue wave’ dominating next month’s US elections, raising likelihood of more fiscal stimulus post-elections, a weak USD backdrop may be here to stay.

Previous week’s recap: USDPHP consolidated in a tight range of 48.35-45. Before start of the week, USD rallied briefly as risk-off prevailed on last Friday’s (10/2) news of US President Trump testing positive for COVID-19. Risk-on resumed accompanied by weak USD as Trump decided to return to the White House after a 2-day hospital stay. Equally important is the political consensus building up for the US Congress to pass a fiscal stimulus package. While Trump rejected further negotiations on a total package, he proposed piecemeal income relief/support for airline workers and others. USDPHP went through shallow adjustments despite a plethora of unfavourable newsflow including escalation of case infections in the US and Europe


Market Focus


PSEi Forecast range: 5,800 – 6,000
Accumulate the index

Week ahead: The index will continue to trade within the narrow range of 5,800 – 6,000. Market looks ripe for profit-taking as PSEi edges closer to 6,000. The lack of interest in big cap names is likely to persist among retail investors. This local bias for non-index stocks was a reaction to foreign selling overhand in the market. Until foreign net outflows dissipate, PSEi’s strong market resistance seems to be at 6,000. PSEi may look to offshore news and developments for catalysts this week.

Previous week’s recap: PSEi jumped 1.27% (74.78 pts) intra-day in Thursday’s session, breaking a three-day slump and wiping out losses from the previous two sessions with bargain hunters buying the index up. Exiting foreign funds persisted as net outflows accelerated week-on-week amid unexciting PH recovery prospects and likelihood of delayed approval of the 2021 PH budget program.

Article by: Ruben Carlo Asuncion
Contribution from Bank Treasury, Trust & Investments and Corporate Planning Groups

Image Source: Freepik

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