Yields on gov’t debt end mixed amid volatile trade

YIELDS on government securities (GS) traded at the secondary market ended mixed last week amid a rise in US yields and a weakening peso as US Federal Reserve officials signaled caution on future rate cuts.

GS yields, which move opposite to prices, inched up by an average of 1.15 basis points (bps) week on week, based on the PHP Bloomberg Valuation Service Reference Rates as of Sept. 26 published on the Philippine Dealing System’s website.

At the short end of the curve, yields on the 91-, 182-, and 364-day Treasury bills (T-bills) went down by 1.04 bps (to 4.9354%), 3.41 bps (5.1635%), and 4.34 bps (5.2607%), respectively.

Meanwhile, at the belly, rates mostly went up. Yields on the three-, four-, five-, and seven-year Treasury bonds (T-bonds) rose by 1.52 bps (5.6685%), 3.49 bps (5.7650%), 4.8 bps (5.8392%), and 6.23 bps (5.9328%), respectively. On the other hand, the two-year paper saw its rate go down by 0.81 bp to 5.5478%.

Lastly, at the long end of the curve, the 10- and 20-year notes climbed by 6.23 bps and 0.04 bp to yield 6.0263% and 6.3449%, respectively. Meanwhile, the rate of the 25-year T-bond inched down by 0.11 bp to 6.3434%.

GS volume traded declined to P34.38 billion on Friday from P43.82 billion a week prior.

Traders said that yields at the short end mostly went down to reflect bets on the Bangko Sentral ng Pilipinas’ (BSP) policy path.

“The yield curve steepened week on week as investors focused demand at the short end, reflecting sustained conviction in the BSP’s easing cycle,” the first bond trader in a Viber message.

“[Fed Chair Jerome H.] Powell’s remarks about balancing inflation and labor market risks reinforced the ‘higher-for-longer’ stance. This means that the front end was relatively anchored given expectations that the BSP will hold rates steady for now,” the second trader said.

Last week, BSP Governor Eli M. Remolona, Jr. said they could lower borrowing costs further as early as October if the economy shows signs of losing momentum.

The Monetary Board last month slashed benchmark rates by 25 bps for a third straight meeting to bring the policy rate to 5%. This brought cumulative cuts since August 2024 to 150 bps.

Mr. Remolona has described the policy setting as a “Goldilocks rate,” balancing inflation and growth. “We’re in the Goldilocks zone, I would say,” he said. “So, if the forecast stays… we’re going to stay where we are in terms of the policy rate. There may be small adjustments — a pause or an ease — but more or less, we’re going to be at the same range.”

He said 25-bp reductions at their October and December meetings are “possible but not likely.”

Meanwhile, the Fed this month lowered its target rate by 25 bps to the 4%-4.25% range, which was its first cut since December. This brought its total reductions since September 2024 to 125 bps. Its “dot plot” showed projections of two more rate cuts this year.

Mr. Powell said on Tuesday the central bank needed to continue balancing the competing risks of high inflation and a weakening job market in coming interest rate decisions, even as his colleagues staked out arguments on both sides of the policy divide, Reuters reported.

“Meanwhile, the belly to the long end followed the rise in US yields, adding upward pressure and reinforcing the market’s steepening bias,” the first trader said. “We also saw bonds taking cues from US Treasuries, where yields climbed after stronger-than-expected data on home sales, durable goods, and GDP (gross domestic product). The numbers pointed to resilience in the US economy and led markets to rethink the pacing of US Fed rate cuts.”

The result of the Bureau of the Treasury’s dual-tenor bond auction last week came within market expectations and supported the belly of the curve at the start of the week, but yields eventually climbed due to the peso’s weakness, the trader added.

“The risk-off tone from geopolitical concerns and cautious Fed speak weighed on emerging-market assets. The dollar-peso exchange rate hovering above P58 also kept offshore accounts defensive, supporting demand for shorter-dated government securities,” the second trader said.

On Friday, the peso closed unchanged at P58.10 per dollar due to the Fed’s cautious signals and as domestic concerns weighed on market sentiment.

“Attention was on the Bureau of the Treasury’s (BTr) fourth-quarter borrowing plan. The program came in lighter than the previous quarter, which was already expected. While this setup was bond-friendly, sentiment was tempered by corruption headlines onshore that pressured the peso and may have also weighed on appetite for government bonds,” the first trader added.

The government is looking to borrow P437 billion from the domestic market in the fourth quarter, the BTr said in a notice last week. Broken down, it aims to raise P262 billion through T-bills and P175 billion from Treasury bonds T-bonds.

For this week, the trader said GS yields may continue to track the movement of US Treasuries.

“Any sell-offs in government bonds are likely to be shallow, as the outlook still looks constructive given expectations of further BSP cuts and the lighter issuance program. At the same time, political noise and peso swings are things to watch. We also see the bond curve likely continuing to steepen in the near term,” the first trader said.

The second trader said bond yields may move sideways to up due to the Fed’s “higher-for-longer” policy stance and as market players position before the release of September Philippine inflation data next week.

“Investors should monitor the peso’s performance versus the US dollar as further weakness could add pressure on long end yields,” the second trader said. — Heather Caitlin P. Mañago