Reuters

Philippine debt yields dropped around 20 basis points in heavy trading on Friday after the Bangko Sentral ng Pilipinas effectively pumped funds into the market by cutting rates on its Special Deposit Accounts (SDAs) and removing half the available tenures.

"The rally we saw yesterday is continuing for the day," said one Manila-based dealer. "We are seeing a lot of shifting of liquidity."

Trading was concentrated in maturities between one year and five years with yields dropping as much as 35 basis points in the one year paper and an average of around 20 bp's in the other tenures.

Banks had locked in up to 600 billion pesos ($14 billion) in the SDAs, which offered a maximum tenure of six months and relatively attractive returns, and the BSP's move on Thursday saw investors scrambling for alternatives.

"People are looking for tenures of 5 years down, anything with a yield of between 5.5-6 percent," said another dealer.

Trading volumes were over 17 billion pesos by 0330 GMT, already above the average daily volume of around 11.6 billion pesos with 4 billion pesos exchanged in after-hours dealing on Thursday.

The BSP scrapped the two-month, three-month and six-month maturities on its SDAs and cut the rates on the 1-week, 2-week and 1-month maturities on the SDAs in an effective easing of monetary policy.

Around 300 billion pesos were locked up in the cancelled maturities and dealers expect the inflows to support prices over the next few months.

Equity markets are also expected to benefit from yield-seeking investors but the main index was down around 1.37 percent on Friday.

A further drop in debt yields could be capped by fears of rising inflation, which encouraged the central bank to keep its headline policy rates unchanged.

The overnight borrowing rate was left at at 5.0 percent, the lowest since May 1992, and the lending rate at 7.0 percent.

Annual inflation hit a 16-month high of 5.4 percent in February amid rising food and fuel costs and price pressures are expected to peak in the second quarter.

"Next week, we will probably consolidate a bit, move sideways. We have probably dropped 30 basis points for the month to date we will probably settle there for a while and reassess the market," said the first bond dealer.

Philippine markets will finish trading on Wednesday next week ahead of the Easter holidays, encouraging banks to take profits and potentially limiting the drop in yields.