Inflation (Part II)

The previous post referred to inflation trends as indicated by long-tenor government bonds. There is corroborative evidence, however slight, shown by corporate bonds issuance in the first half of the year. The trend in bond yields is unmistakably upward. 

The chart above shows the coupons on Peso-denominated corporate bonds issued in each month up to June 2014. Not included are subordinated bonds issued by banks, and one bond which had a tenor of 1 year only. What is left are either Senior Unsecured or Unsecured bonds, either unrated or rated PRSAaa, and issued in the domestic market. In other words, they share almost the same credit risk profile, and the difference in their yields at issuance (or coupons) preponderantly accounts for market conditions and not individual credits of the issuers. 

What can be seen in evidence is the jump in yields, particularly among 7-year bonds. Whereas in January a 7-year PLDT bond printed below a 5.5-year ABS-CBN paper, by March, a 7-year paper by MNTC was higher by 43bps compared to ITS OWN 5.5-year callable note. The 5-5-year (apparently a favorite among issuers, as this tenor was the most numerous of all issuances this year) line shows month-to-month volatility, but adding a trend line shows a perceptible rise throughout the first six months of the year, led by the San Miguel Brewery issuance in April. 

That there is a jump in corporate bond yields this year can be clearly seen in the charts, and is even more in evidence compared to government bond yields. That this is caused by inflationary concerns is also not in doubt. What is subject to debate is the cause of inflation: is it a product of too-high GDP growth, or is there another factor that analysts have not yet grasped? 

Looking at the chart from the prior post it can be clearly seen that the fall in GDP growth rates coincides with inflation concerns. At first glance, the data do not show that higher economic growth expectations are leading to higher inflation. In addition -- and more important for analysts -- inflation is not “caused by” higher economic growth. Inflation is caused by too much money chasing too few goods, as the saying goes, but it bears emphasis that it is not only “too much money” that needs to be factored in, but also “too few goods”. If there is too much money but there are too few goods, then there would be a problem of inflation. But if there is high money growth that this is matched by a boost in production, then there would be no inflation. Producing more goods -- also known as economic growth -- would not, ipso facto, lead to inflation; in fact, it dampens inflation.

That is the reason why observers and analysts have to look elsewhere for a cause of inflation. One such possible cause will be explored in a succeeding post.