Yields on gov’t debt end flat on RRR cut

YIELDS ON government securities (GS) traded on the secondary market were flat last week amid ahead of the central bank’s decision to cut big banks’ reserve requirements in tranches.

On average, GS yields inched down by 1.9 basis point (bp) week on week, according to the PHP Bloomberg Valuation Service (BVAL) Reference Rates as of May 17 published on the Philippine Dealing System’s website.

“Most of the short-term Philippine interest rate benchmark yields (PHP BVAL yields) mostly lower for the third straight week, by as much as -0.09, after the latest -2 percentage points cut in reserve requirement ratio (RRR) of large banks (or additional peso liquidity infusion/money supply of about +PHP180 billion into the financial system, which fundamentally reduce the price of money or interest rates)…,” said Michael L. Ricafort, economist of the Rizal Commercial Banking Corp. (RCBC).

He noted the easing in short-tenored debt papers while most medium- to long-term notes corrected.

“[T]he cut in RRR in tranches…would already lead to some easing in some local interest rate benchmark tenors, especially if short-term tenors ease further (leading to some normalization of the local yield curve), as the markets already anticipate the staggered increase/improvement in the supply of peso funds in the financial system starting about two weeks from now, and about a month and two months thereafter,” Mr. Ricafort said.

“Weaker peso exchange rate partly caused the slight upward correction in most of the long-term PHP BVAL yields on a week-on-week basis, amid some profit-taking in the local stock market (in reaction to the profit-taking in the US/global stock markets, after US and China imposed higher tariffs on each other’s goods),” he added. — Carmina Angelica V. Olano

Meanwhile, a bond trader said the RRR cut led to profit-taking.

“The policy adjustment was widely expected. The decision to do it in tranches prompted profit taking among dealers,” the trader said.

Last Thursday, the Bangko Sentral ng Pilipinas (BSP) fired off a 200-bp phased reduction in big banks’ RRR from 18% to 16%. This was a week after it slashed benchmark interest rates by 25 bps in the face of easing inflation and slowing economic growth.

The cut will be implemented in three stages for universal and commercial banks: 100 bps effective May 31, 50 bps effective June 28 and 50 bps effective July 26.

This move follows a cumulative 200-bp cut in big banks’ RRR last year to 18%, which BSP Governor Benjamin E. Diokno had described in his first press briefing last March as still “really high.”

The BSP estimates that each percentage point cut in banks’ reserves will unleash some P90-100 billion into the economy.

Meanwhile, the peso plunged further against the dollar on Friday to hit a seven-week low as market participants responded to the RRR cut, ending the week at P52.63 against the P52.48 finish on Thursday. This was the peso’s worst close since it ended at P52.75 versus the dollar on March 28.

As for external factors, the US-China trade war escalated anew as the US imposed higher tariffs on Chinese goods, causing China to retaliate. The US hiked its tariffs to 25% from 10% on $200 billion of Chinese goods. In return, China hit back by raising its tariff rate on $60 billion worth of US imports to 20%-25% from 10%.

Treasury bills (T-bill) eased across the board, led by the 91-day debt papers which yielded 5.514%, down 9.1 bps from week-ago levels. The 182-day and 364-day T-bills went down 8.1 bps and 8.9 bps to yield 5.784% and 5.968%, respectively.

Bonds at the belly of the curve climbed, except for the two-year Treasury bond (T-bond) which closed at 5.794%, down 0.4 bp. The three- and four T-bonds yielded 5.758% and 5.740%, up 1.3 bp and 1.9 bp, respectively. Similarly, the five-, seven-, and 10-year papers’ rates went up 2.1 bps, 2.2 bps and 4.2 bps week-on-week to 5.739%, 5.763%, and 5.788%, respectively.

Yields on longer-term debt papers declined, with the 20- and 25-year T-bonds quoted at 5.951% and 6.046% on Friday, down 0.3 bp and 6.3 bps, respectively, from a week ago.

For this week, the bond trader expects yields to “trade sideways with downward (yields) bias as market players continue to digest everything that’s happening,” citing the local RRR and benchmark policy interest rate cuts, as well as the escalating US-China trade dispute.

For RCBC’s Mr. Ricafort, “short-term local interest rate benchmarks would continue to ease, in anticipation for the effectivity date of the first tranche of the RRR cut… The markets have the tendency to price in/factor in these positive developments in advance, in terms of some further downward adjustments in local benchmark yields in the coming week, in anticipation of upcoming increase in domestic liquidity/supply of peso funds in the financial system.

“Most long-term PHP BVAL yields could resume their easing trend once the peso exchange rate against the US dollar starts to stabilize, at the very least,” he added. — Carmina Angelica V. Olano