Yield Tracker

LOCAL GOVERNMENT securities (GS) rallied last week despite continued expectations of another interest rate hike in the US as well as its tax reform plans.

Local debt yields dropped 6.65 basis points (bps) on average week-on-week, data from the Philippine Dealing & Exchange Corp. (PDEx) as of Sept. 29 showed.

At the secondary market, yields on the short-end rallied with rates on the 91-, 182-, and 364-day Treasury bills (T-bills) going down by 73.38 bps, 2.32 bps, and 2.61 bps to fetch 2.0251%, 2.4988%, and 2.8674%, respectively.

Long-term tenors rallied as well with rates on the 10- and 20-year debt papers down 1.15 bps (4.6085%) and 26.42 bps (5.1479%), respectively.

In contrast, yields at the belly of the yield curve went up with the four-year Treasury bond (T-bond) rising the most by 15.89 bps to 4.5768%. This was followed by the five-year T-bond, whose rates were up 11.36 bps (4.6375%). Finally, yields on the two-, three- and seven-year debt papers were up by 9.64 bps (3.7821%), 2.22 bps (3.6651%) and 00.32 basis point (4.3206%).

“GS yields unexpectedly fell overall [last] week, as rates declined significantly [last] Tuesday due to geopolitical tensions abroad, such as the one between the US and North Korea,” said Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines.

“The drop in yields came even as US Federal Reserve Chair Janet L. Yellen affirmed views of another US rate hike this year,” he added.

For Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, the local GS yield movement last week was unexpected, noting the previous movements of rising yields that were attributed to expectations of the Fed raising rates despite inflation settling below the targeted 2%.

“[I]nvestors eventually shrugged off these statements with the yields decline,” he said.

For a bond trader, yields “tracked the global sentiment” for bonds due to the “triple whammy” of US President Donald J. Trump’s tax plan proposal, a hawkish Fed and higher oil prices, which “torpedoed positions.”

Mr. Trump had long promised to cut business taxes as part of his administration’s tax reform plan. Specifically, he announced last week a tax framework slashing corporate and partnership business income taxes to 20% and 25% respectively.

Likewise, the Fed has been signaling its desire to increase interest rates within the year with Ms. Yellen saying that gradual interest rate hikes at this time is “the most appropriate policy approach amid higher uncertainty about inflation.” While US inflation has remained below target, US gross economic product growth was revised upwards to 3.1% in the second-quarter. Growth in the third quarter, however, is expected to slow down due to the damage caused by hurricanes Harvey and Irma.

This week, market players will be monitoring inflation data from the US and local reports direction, the bond trader said.

Landbank’s Mr. Dumalagan said: “GS yields might correct upwards amid bets of upbeat US reports on employment and non-manufacturing as well as steady to higher Philippine inflation data in September 2017.”

“Strong US reports keep open the possibility of another US rate hike this year, while an increase in Philippine inflation raises the chances of a similar tightening move by the Bangko Sentral ng Pilipinas in 2017,” he said. “Positive developments about the US and Philippine tax reforms might also push yields higher. The rise in yields might be tempered by geopolitical noise.”

Philippine inflation data is set to be released this Thursday. — Michelle Anne P. Soliman

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