Banks/Insurance
Manulife Investment Management is advising investors to adopt a barbell investment strategy in response to the unexpected uptick in the country’s inflation rate in August. The strategy, aimed at navigating an increasingly uncertain interest rate environment, involves allocating capital to short-term bonds to benefit from immediate policy rate adjustments, while selectively adding long-term bond exposure if inflation expectations remain anchored.
In a recent research note, Jean de Castro, head of fixed income at Manulife Investment Management, emphasized the importance of staying vigilant in light of evolving inflation data and central bank policy signals.
“We are cognizant of the recent uptick in inflation which somewhat complicates the outlook for long-duration bonds,” said de Castro. “If inflation continues to surprise on the upside, long-term yields may rise, reflecting increased inflation risk and potential for the BSP [Bangko Sentral ng Pilipinas] to pause in its cutting cycle.”
However, de Castro noted that if markets interpret the inflation spike as temporary and the BSP maintains an accommodative policy stance, long-term bonds could still offer value.
The BSP’s recent 25-basis-point rate cut on August 28 enhances the appeal of short-term bonds, she said, as yields on the front end of the curve adjust swiftly to policy shifts.
“If the central bank signals further easing, short-duration instruments become attractive against this backdrop,” de Castro added.
On the macroeconomic front, de Castro acknowledged that the country’s strong GDP growth supports corporate earnings and reduces default risk, tightening credit spreads for high-quality issuers. But she cautioned that rising inflation could erode margins, especially in vulnerable sectors, potentially leading to wider spreads.
“Robust growth and accelerating inflation generally put upward pressure on government bond yields, as investors demand higher compensation for inflation risk and anticipate potential policy normalization,” she explained.
Headline inflation climbed to 1.5 percent in August, up from 0.9 percent in July, bringing the year-to-date average to 1.7 percent, well below last year’s 3.3 percent average. While still under the BSP’s 2–4 percent target, the inflation rebound raises questions about the sustainability of further easing.
“The interplay of strong growth and rising inflation creates a nuanced environment where investors should monitor credit quality and remain agile across the curve,” de Castro concluded. “Balancing the benefits of policy easing against the risks of any possible inflation surprises is key.”
