The country’s local currency bond market reached P11.7 trillion in the second quarter, up by 1.3 percent versus the first quarter period amid a decelerating inflation and the slow-growing economy, according to a report from the Asian Development Bank (ADB).

In the September 2023 ADB Asian Bond Monitor review, released on Monday, Sept. 11, the Manila-based multilateral organization said the Philippine local currency bond market size and issuance continued to grow, noting expansions in both the corporate and government side.

Of the P11.7 trillion debt stock, 82.4 percent were treasury and other government bonds. This was up by 2.3 percent as of end-June from end-March “as issuances exceeded maturities”.

Meanwhile, with decelerating inflation the central bank securities declined by 15.8 percent quarter-on-quarter due to a drop in issuance in the second quarter.

As for the corporate bond market which was 13.6 percent of the total debt stock, ADB reported that this managed to recover by 1.2 percent quarter-on-quarter on account of the large volume of issuances, reversing the 2.2 percent contraction in the first three months of the year.

“The Philippine corporate bond market remained dominated by the property, banking, and holding firms sectors, which accounted for a collective share of 81.0% of total corporate bonds outstanding at the end of Q2 2023,” said ADB.

The report also noted that local currency bond issuance declined by 19.2 percent quarter-on-quarter because of government’s lower bond issuance during the period.

Treasury issuances and other government bonds contracted by 39 percent during the second quarter and this was “mainly driven by a relatively high base in the preceding quarter” with a P283.7 billion Retail Treasury Bonds in February.

The ADB also noted that issuance of central bank securities, which was 70.7 percent of total issuance in the second quarter, dipped by 11.2 percent quarter-on-quarter amid a slowing inflation.

Corporate bonds issued during the same quarter however grew by 117.6 percent compared to an 81.7-percent contraction in the first quarter.

ADB said the investor profile for the local currency bond market was relatively similar to the trend same period in 2022 as “banks and investment houses continued to hold nearly half of the total” government debt stock.

Based on the report, banks and investment houses’ market share rose to 46.7 percent in June 2023 from 44.4 percent in the same period last year.

Contractual savings institutions and tax-exempt institutions remained the second-largest investor group in the economy’s government bond market, with shareholdings that decreased to 31.8 percent in June from 33.5 percent in 2022, said the ADB.

“All other investor holdings shares remained below 10% and showed a downward trend from their previous investment percentage shares a year earlier,” ADB added, except for Bureau of the Treasury-managed funds, whose holdings it said was maintained at around seven percent during the quarter.

In terms of yield movements, ADB noted that government bond yields  have increased for most tenors between June 1 to August 31. Only the 1-month and 3-month tenors decreased during this time.

“The increase in yields was influenced by the Bangko Sentral ng Pilipinas’ hawkish tone amid persistent elevated inflation despite a continued decline since February,” said ADB.

“In addition, an increase in yields was also influenced by dampened investor sentiment due to the economy’s slower-than-expected growth,” it also said.

The country’s gross domestic product only grew by 4.7 percent in the second quarter, slower from 6.4 percent in the first quarter.

Inflation, meanwhile, had been on a downtrend for six months since reaching a peak of 8.7 percent in January. The consumer price index (CPI) fell to 4.7 percent in July but because of bad weather and supply shocks, the CPI again rose to 5.3 percent in August.

ADB said Monday that central banks in the region, particularly in emerging East Asia “need to stay vigilant to guard against potential financial risk associated with higher interest rates.”

“Softening inflation in the past several months has allowed most central banks in the region to hold off on further interest rate hikes, and some have started lowering rates to boost economic growth. Still, elevated price pressures, a solid job market, and robust economic performance in the United States could lead to further interest rate increases by the US Federal Reserve,” said ADB in the report.

It further noted that interest rates in the region is still high leading to “higher borrowing costs (that) have contributed to debt stress and bond defaults in some Asian markets over the past few months.”

“Asia’s banking sector showed resilience during the recent banking turmoil in the US and Europe, but we’ve seen vulnerabilities and defaults among both public and private borrowers since last year,” said ADB Chief Economist Albert Park. “Higher borrowing costs pose a challenge especially for borrowers with weak governance and balance sheets,” he added.