Yields on government debt climb as markets anticipate December Fed interest rate hike

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YIELDS on government securities (GS) climbed last week amid persistent expectations of another US rate hike this year, as well as near-term inflation concerns.

Local debt yields rose by 19.88 basis points (bps) on average week on week, data from the Philippine Dealing & Exchange Corp. as of Nov. 10 showed.

“GS yields increased [last] week due to three main factors: continued expectations of another US rate hike this year, higher Philippine inflation and increased supply of corporate and government debt securities,” said Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines (Landbank).

The US Federal Reserve has signalled that another interest rate hike will take place in December as it looks to support the US economy’s steady expansion pace.

Meanwhile, inflation picked up further last month, according to a report by the Philippine Statistics Authority (PSA) released last Tuesday. Headline inflation stood at 3.5% in October, the fastest pace in nearly three years.

According to Mr. Dumalagan, “yields initially declined on Monday, partly driven by the nomination of dovish Fed official Jerome [H.] Powell as the new head of the US central bank.”

In an announcement at the White House last Nov. 2, US President Donald J. Trump named Mr. Powell as the next head of the US central bank to replace incumbent chair Janet L. Yellen, whose four-year term will end on Jan. 31 next year.

For Ruben Carlo O. Asuncion, chief economist at the UnionBank of the Philippines (UnionBank), the secondary market was “relatively quiet” last week, with trades coming in on “thin volumes.”

“However, markets perceive that the US tax reform may hang in the balance and may suffer the fate of Mr. Trump’s previous attempts at legislating his campaign promises,” he said.

He added that this week’s 31st ASEAN (Association of Southeast Asian Nations) Summit and Related Summits will likely keep investors “watching on the sidelines.”

At the secondary market last Friday, yields climbed across the board except for the three-year paper which declined 33.71 bps to fetch 3.8175%. At the short end, the 91-, 182-, and 364-day Treasury bills (T-bill) climbed 25.58 bps (2.6879%), 11.64 bps (3.0182%), and 2.43 bps (3.0618%), respectively.

At the belly, yields on the two-, four-, five-, and seven-year Treasury bonds also increased by 43.43 bps (4.4450%), 39.57 bps (4.9689%), 40.64 bps (5.1189%), and 31.46 bps (5.2521%), respectively.

At the long end of the curve, the 10- and 20-year securities saw their rates increase by 28.32 bps (5.4046%) and 9.46 bps (5.5750%), respectively.

Sought for his outlook for this week’s trading, Landbank’s Mr. Dumalagan said yields might increase “although at a slower pace” driven by a likely strong Philippine economic growth print for the third quarter.

“The rise in yields might be capped by steady to softer US inflation data. Developments on US tax reform may continue to introduce volatility,” he said.

UnionBank’s Mr. Asuncion concurred: “Trading might continue to stay muted [this] week if no fresh leads come up. The ASEAN holidays may keep some players watching on the sidelines,” he said.

“In connection, the T-bill auction was moved to Thursday for value Friday. Early indicative rates are showing rates going up as high as 20 bps for the 3-month bills.”

The Bureau of the Treasury, following the declaration of Nov. 13-15 as special non-working days, rescheduled the Nov. 13 Treasury bills auction to Thursday for settlement on Friday, according to a memorandum on its Web site.

UnionBank’s Mr. Asuncion sees the Philippine gross domestic product (GDP) breport as something that traders might look at. “This may move markets,” he said.

Official third-quarter GDP data will be released on Thursday by the PSA. — Arianne Kristel R. Pelagio