Yields on government debt drop on BSP bets

By Jobo E. Hernandez, Researcher

YIELDS ON government securities (GS) fell last week on expectations of rate cuts from the Bangko Sentral ng Pilipinas (BSP) and safe-haven demand due to lingering tensions in Hong Kong.

GS yields dropped by an average of 14.3 basis points (bps) week on week, based on the PHP Bloomberg Valuation Service Reference Rates as of May 29 published on the Philippine Dealing System’s website.

At the secondary market, GS yields fell across-the-board at the close of trading last Friday. The 91-, 182-, and 364-day Treasury bills (T-bills) declined by 4.8 bps, 6.7 bps, and 11.5 bps, respectively, to yield 2.08%, 2.186%, and 2.512%.

At the belly of the curve, yields on the two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) also fell by 19.6 bps (2.54%), 21.8 bps (2.607%), 20.6 bps (2.674%), 17.5 bps (2.756%), and 12.4 bps (2.949%), respectively.

Rates of the 10-, 20- and 25-year T-bonds likewise went down 11.9 bps, 23.8 bps, and 6.4 bps from the previous week to 3.155%, 3.949% and 4.224%, respectively.

“Philippine GS continued to rally across the curve over strong liquidity and dovish remarks from BSP Governor [Benjamin E.] Diokno,” First Metro Asset Management, Inc. (FAMI) said in an e-mail.

FAMI also noted the full award of the reissued T-bonds offered last Wednesday.

“The 5-year and below space continued to see strong demand as the reissuance of FXTN 5-76 received P118.42 billion versus the P30-billion offer. This led to an additional tap of P20 billion at an average yield of 2.676% — 134.2 bps lower than the 4.018% rate in the last March 3 auction,” FAMI said.

“The Treasury also released their borrowing plan for June, retaining auction volumes and offering the same bond tenors of 3- and 5-year papers. The June auction size brings total borrowing [in the second-quarter] to P530 billion,” it added.

In a separate e-mail, a bond trader attributed the fall in GS yields to “safe-haven demand” amid escalating US-China tensions over the political situation in Hong Kong, as well as market expectations of a BSP policy rate cut in its meeting on June 25.

Last Tuesday, Mr. Diokno said among the factors they will consider at the Monetary Board’s June 25 meeting include May inflation data, the first-quarter gross domestic product (GDP) report and “high-frequency indicators” such as the purchasing managers’ index, trade, and the number of flights and passengers, which will be used to gauge if there will be a pickup in transport and tourism when the lockdown is lifted.

Headline inflation stood at 2.2% in April, marking the third consecutive month of a slower rise in prices of commodities. Last month’s decline was on the back of lower oil prices and other non-food items.

May inflation data will be reported by the Philippine Statistics Authority on Friday.

Meanwhile, first-quarter GDP dropped by 0.2%, the first contraction since the three percent fall recorded in the fourth quarter of 1998. Economic managers now expect the economy to shrink by 2-3.4% on expectations of a worse fallout due to the pandemic.

Abroad, China approved on Thursday a new national security legislation for Hong Kong that seeks to, among others, criminalize acts that threaten national security in the semiautonomous city such as subversion and secession. Earlier, the US has threatened to impose sanctions on Hong Kong and mainland China if the security law is passed.

“Yields might continue to decline [this] week amid likely weaker Philippine inflation for May 2020 and expectations of downbeat US labor reports, including hints of more monetary easing from the European Central Bank,” the bond trader said.

For FAMI: “We see strong interest in the front-end to steepen the curve further.”

“May inflation print should remain within the BSP forecasts of 1.9-2.7% albeit price pressures on agricultural products due to typhoon Ambo. We see that the highly liquid market and accommodative monetary measures will sustain current levels across the curve for now,” FAMI said.