Weak Peso May Erode Appeal of Philippine Bonds to Foreign Funds

MANILA, Philippines — The peso's slide, which has made it the worst-performing currency in Asia, could diminish the appeal of Philippine bonds to foreign investors, as rising currency risk may offset their yield advantage and push investors to demand a higher risk premium, Manulife Investments Philippines said. “A volatile peso increases foreign exchange risk for offshore investors, which can offset the attractive yield advantage of Philippine bonds and reduce the willingness of foreign funds to hold peso-denominated assets,” Jean Olivia de Castro, head of fixed income at Manulife Investments, said. “While currency depreciation does have inflation implications, what matters just as much for the bond market is investor confidence,” she said. De Castro said the peso’s slide, which now hovers around the P62-per-dollar level, reflected a combination of elevated oil prices, a wider trade deficit, broad dollar strength and persistent global risk aversion. The peso slumped to a new record low of 62.625 against the dollar on Sept. 8, making it the worst performing currency in Asia after depreciating by more than six percent from the end-2025 closing of 58.79 to $1. From a fixed income perspective, De Castro said sustained currency weakness can prompt investors to demand a higher risk premium, pushing local bond yields higher and increasing borrowing costs. The Bangko Sentral ng Pilipinas (BSP) recently raised key interest rates by 25 basis points, bringing the target reverse repurchase rate to five percent to tame high inflation. The central bank’s Monetary Board has so far raised policy rates by 75 basis points since the current tightening cycle began. “That said, the Philippines continues to benefit from healthy reserve buffers, a credible central bank committed to managing excessive volatility and relatively attractive real yields versus regional peers,” De Castro said. Manulife expects a stabilization in oil prices, improving external balances and continued BSP policy credibility to eventually help restore confidence in the peso and support foreign participation in the local bond market over the medium term. However, not all peso depreciation episodes are equally disruptive for bonds, she said.