Gov’t debt yields flat on rate cut hints

YIELDS ON government securities (GS) moved sideways during the last trading week of 2020 as market players repositioned after the central bank chief hinted on more policy rate cuts in the medium term.

On average, GS yields — which move opposite to prices — went down by an average of 0.6 basis point (bp) week on week, based on the PHP Bloomberg Valuation Service Reference Rates as of Dec. 29 published on the Philippine Dealing System’s website.

Financial markets were closed from Dec. 30 to Jan. 1.

Despite the shortened trading week, yields on nearly all tenors retreated on Tuesday from their Dec. 23 finish except for the 20- and 25-year papers, which went up by 6.9 bps and 7.1 bps, respectively, to fetch 3.965% and 3.95%.

The rate of the three-year bond dropped the most, losing 4.3 bps to end at 2.077%, followed by the four-, two-, five-, and seven-year papers, which decreased by 3.8 bps, 3.2 bps, 3.1 bps, and 2.2 bps, respectively, to yield 2.299%, 1.846%, 2.503%, and 2.783%.

Yields on the three-month and six-month Treasury bills likewise declined by 1.4 bps (to 1.117%) and 1.3 bps (1.414%), while the 10- and one-year bonds shed 1.2 bps (2.996%) and 0.1 bp (1.712%).

“This is mostly driven by positioning ahead of potential easing measures by the BSP (Bangko Sentral ng Pilipinas) in the early months of 2021, especially following comments about more room for accommodative policy in the short-to-medium term and BSP’s goal of keeping interest rates low until 2022,” Security Bank Corp. First Vice-President and Head of Wholesale Treasury Sales Carlyn Therese X. Dulay said in an e-mail.

“The buying is mostly skewed around the three-year basket, given that next month’s bond auctions will be on the five- and seven-year sector,” Ms. Dulay added.

“Last two weeks of 2020 saw more activity than expected for this time of year as demand picked up on the belly (three- to seven-year bonds) of the yield curve. Buying interest surged with some investors waiting until the end before deploying cash over the New Year holiday,” ATRAM Trust Corp. Head of Fixed Income Jose Miguel B. Liboro said in a separate e-mail interview.

BSP Governor Benjamin E. Diokno, in an interview with Bloomberg TV on Dec. 22, said the central bank has monetary space available as it plans to keep a low interest rate environment until end-2022.

The central bank last year trimmed the rates on its overnight reverse repurchase, lending, and deposit facilities by a cumulative 200 bps to record lows of 2%, 2.5%, and 1.5%, respectively, to prop up the consumption-driven Philippine economy reeling from the fallout brought by the coronavirus pandemic.

Meanwhile, the Bureau of the Treasury (BTr) will borrow P140 billion from the domestic debt market this month — P20 billion more than it programmed last December — leveraging on robust demand seen during previous auctions.

Ms. Dulay sees local yields moving “range-bound” this week, with a slight upward bias for tenors of five years and up, as the market will be taking in P30 billion in five-year bonds.

“This will thicken the supply in the already heavy five-year sector hence market might show some defensiveness on the bid side until clearer downward catalysts emerge,” she said.

The Treasury will offer reissued 10-year bonds with a remaining life of 4.8 years worth P30 billion on Tuesday.

Mr. Liboro expects yields to consolidate early on, with investors gauging market interest during the BTr’s five- and seven-year note auctions in January.

“Given the persistent demand on that portion of the curve, the five-year auction should generate decent demand and clear within the 2.5%-2.75% range. Given that we are currently trading around the 2.5% level, an award at the higher side of that range could cause rates to adjust marginally higher in the short-term,” Mr. Liboro said. — Lourdes O. Pilar