(Bloomberg) -- Philippine government bonds, Asia's best-performing local-currency debt this year, are losing their appeal as real interest rates turn negative.
The nation's annual inflation rate climbed to a six-month high of 2.7% in July, a government report showed Wednesday, pushing them further above the central bank's benchmark rate of 2.25% and the two-year bond yield at 2.01%. Consumer prices were boosted by rising costs for transport, housing, water and gas.
The quickening pace of consumer-price gains suggests the central bank will be increasingly reluctant to cut interest rates again after lowering its overnight borrowing rate by a combined 150 basis points from March to help counter the coronavirus pandemic. The successive rate cuts have seen Philippine sovereign debt return 17% this year, according to data compiled by Bloomberg.
“The massive bond rally is probably coming to an end,” said Emilio Neri, lead economist at Bank of the Philippine Islands in Manila. “With negative real rates already upon us, rate cuts are probably near the floor.”
Real interest rates, which measure the central bank's benchmark minus the level of inflation, are still positive in most emerging markets, with those for Malaysia, Indonesia and Thailand all above 2%. The negative rate for the Philippines puts it in the camp of developed economies such as the U.S., the U.K. and Canada, where the pace of inflation is above the central bank benchmarks.
The current policy stance can hold for the next few quarters and foreign investment is likely to keep coming in, Philippine central bank Governor Benjamin Diokno said last week. Policy makers next meet to review interest rates on Aug. 20.
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