Yields on gov’t debt climb on inflation, hawkish BSP

Yield Tracker

YIELDS on government securities (GS) rose last week amid a risk-off tone in the market due to concerns on near-term inflation as well as the hawkish sentiments from the Philippine and US central banks.

GS yields rose by an average of 14.84 basis points (bps) week-on-week, data from the Philippine Dealing & Exchange Corp. as of Feb. 9 showed.

With the exception of the 182-day and 20-year debt papers, GS yields at the secondary market moved northward. At the short-end of the yield curve, the 91-day Treasury bills (T-bills) increased 33.32 bps to fetch 2.7105%. Likewise, the 364-day T-bills moved up by 2.74 bps to 2.9265%).

On the other hand, yields on the 182-day papers rallied as yields went down 26.64 bps to 2.8711%.

Meanwhile, the Treasury bonds at the belly saw their yields increase. The two-, three-, four-, five- and seven-year papers added 10.39 bps (3.9152%), 17.40 bps (4.3699%), 54.28 bps (5.0064%), 15.27 bps (4.9193%), and 46.58 bps (6.1804%), respectively.

At the long-end, the rate of the 10-year tenor increased 32.39 bps to 6.5332%. Yields on the 20-year debt paper, on the other hand, went down by 37.37 bps (6.0013%).

Analysts mostly attributed the increase in GS yields to the higher-than-expected domestic inflation result for January, which hit the upper bound of the Philippine central bank’s target for the year.

For Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines, the inflation print increased the possibility of “some hawkish moves” from the Bangko Sentral ng Pilipinas (BSP) this year.

Despite some buying interest coming from the BSP’s decision to keep policy rates unchanged, Mr. Dumalagan noted the BSP’s “slightly hawkish tone” in its monetary policy meeting last Thursday.

“Persistent bets of another US interest rate hike in March 2018 also drove yields higher,” he added.

A bond trader shared this assessment, adding that concerns on rising US interest rates sooner than expected led to the “risk-off tone” prevailing in global financial markets with sell-offs seen across asset classes except for “safe haven currencies.”

Commenting on the BSP’s move to keep policy rates unchanged, the bond trader said the BSP “lent only 10 minutes of relief, with sellers quick to unload into any ‘rally,’”

The BSP kept benchmark borrowing rates steady in its first policy meeting of the year despite expectations that inflation will breach 4% in the months ahead. The central bank discounted its impact as “temporary.”

However, the BSP raised its inflation forecast for the year, expecting price increases to overshoot its 2-4% target for 2018.

For Security Bank Corp. Head of Institutional Sales Carlyn Therese X. Dulay, the government’s rejection of bids for the fresh seven-year T-bonds at last Tuesday’s auction may have lent support to the increase in GS yields.

The papers, which will mature on Feb. 8, 2025, were met with demand worth P25.82 billion among investors, slightly bigger than the P20 billion that the government intended to borrow.

Had the government proceeded with a full award, the T-bonds could have fetched an average rate of 5.273% and a coupon rate of 5.5%, higher than the 4.39% average quoted when these were last sold. However, it would have still been lower than the 5.9432% yield on the seven-year maturity in the secondary market before the auction.

Earlier that day, the government reported headline inflation accelerating to 4% in January, which is faster than the 3.3% and 2.7% readings in December 2017 and January 2017, respectively.

For this week’s trading, Landbank’s Mr. Dumalagan said: “[W]e may again see an upward bias in GS yields amid expectations of stronger US data on retail sales and inflation,” he said.

“These reports are expected to further raise the chances of another US interest rate hike next month. The increase in yields, however, might be tempered by safe-haven buying amid possibly weaker GDP (gross domestic product) growth data from Japan.”

For Ms. Dulay and the bond trader, GS yield movements this week may take its cue from the government’s auction for the T-bills as well as “overall global sentiment.” — Dane Angelo M. Enerio