Weak Peso Not Yet Structural Threat to Philippine Bonds, Says Manulife

MANILA, Philippines — The peso’s depreciation has not yet become a structural threat to Philippine bonds, but prolonged weakness could become more disruptive if it feeds into inflation expectations and broader economic imbalances, according to Manulife Investments Philippines. Jean de Castro, Manulife’s head of fixed income, said in a commentary that external pressures, including elevated oil prices, a wider trade deficit, US dollar strength, and persistent global risk aversion, largely drove the peso’s extended slide. READ: Shaky peso wobbles to new record low Still, de Castro said the currency’s weakness did not necessarily imply a deterioration in the country’s creditworthiness. “Not all peso depreciation episodes are equally disruptive for bonds. The key difference is whether the currency weakness reflects a temporary external shock or a deterioration in domestic fundamentals,” she said. “If depreciation is accompanied by rising inflation expectations, widening external imbalances, declining reserves, or concerns about policy credibility, investors tend to demand a higher risk premium, leading to more sustained pressure on bond yields,” she added. The peso first breached the 62-per-dollar level on Aug. 28, capping a volatile week at 62.265 per dollar, and has since extended its losses to a new record low of 62.625 as of Sept. 8. This puts the currency well beyond the 60-to-62-per-dollar range the Marcos administration assumed for this year. In the bond market, de Castro said a volatile peso increases foreign exchange risks for offshore investors holding peso-denominated assets, as currency losses could erode their investment returns. This could prompt investors to demand a higher risk premium for holding Philippine bonds, pushing local yields higher and, in turn, increasing borrowing costs. Already, the average 10-year Treasury bond yield rose to 7.352 percent this week, prompting the Treasury to accept less than its programmed amount amid weak investor demand. Despite this, de Castro said the country still has healthy reserve buffers, a credible central bank, and relatively attractive real yields compared with regional peers. “As long as the BSP focuses on containing excessive volatility and keeps inflation expectations anchored, market participants are likely to view current currency pressures as a market adjustment rather than a structural threat to Philippine bonds,” she said. “Sovereign credit quality ultimately depends on a country’s ability to meet its obligations through sound fiscal management, economic resilience, external liquidity, and policy credibility. Currency volatility can affect short-term returns and market sentiment,” she added. As a result, the Philippines retained its investment-grade sovereign ratings from the three major credit rating agencies: S&P Global Ratings, Fitch Ratings, and Moody’s Ratings. /pai