Yield Tracker

YIELDS on government securities edged higher last week as the Philippine central bank revised higher its inflation forecasts and as the US Federal Reserve signaled its massive bond-buying taper as early as November.

Bond yields, which move opposite to prices, rose by a week-on-week average of 5.38 basis points (bps), based on PHP Bloomberg Valuation Service Reference Rates as of Sept. 24 published on the Philippine Dealing System’s website.

Local bond yields increased across the board last Friday from their close on Sept. 17, except for the six-month paper, which declined by 1.15 bps to fetch 1.3717%. Meanwhile, yields on the 91- and 364-day notes went up by 0.87 bps and 2.74 bps, respectively, to 1.1215% and 1.6602%.

At the belly of the curve, rates of the two-, three-, four-, five, and seven-year bonds inched up by 0.87 bps, 3.97 bps, 7.57 bps, 10.18 bps, and 10.95 bps, respectively, to yield 1.9427%, 2.3155%, 2.6890%, 3.0651% and 3.7203%.

Long-date papers likewise increase as yields on the 10-, 20-, and 25-year notes grew by 14.3 bps (to 4.3406%), 3.87 bps (5.0640%), and 4.96 bps (5.0557%).

ATRAM Trust Corp. Head of Fixed Income Jose Miguel B. Liboro said local bond yields traded marginally higher initially on the back of the seven-year bond auction from the Bureau of the Treasury (BTr).

“Demand was healthy with more than 2x bid to cover and the auction was fully awarded. Local rates were steady heading into the BSP Monetary Board meeting. Policy rates were held steady as largely expected,” he said in an e-mail interview.

A bond trader said in a separate e-mail interview last week’s yield rally was due to hawkish expectations ahead of the US Federal Reserve policy meeting, while market participants have highly expected that the Bangko Sentral ng Pilipinas (BSP) will keep its policy settings unchanged.

“Participants mainly remained cautious [ahead of the Fed meeting] but anticipated strong upside in yields,” the bond trader said.

“However, the notable upward revisions in the local central bank’s inflation forecasts have driven yields higher on Friday,” the trader added.

The Treasury fully awarded the P35-billion reissued seven-year bonds, with a remaining life of six years and 10 months, on Tuesday as yields climbed due to rising inflation.

Bids for the bonds reached P76.128 billion, more than twice the P35-billion offer, prompting the BTr to open the tap facility for an additional P5 billion.

Average rate for the paper climbed to 3.826%, 3.7 bps higher than 3.789% seen in the previous auction.

Meanwhile, the BSP’s Monetary Board maintained for its seventh consecutive meeting the benchmark policy rate at record-low 2% on Thursday to allow the momentum of economic recovery to gain more traction by helping boost domestic demand and market confidence.

Overnight deposit and lending rates were also kept at 1.5% and 2.5%, respectively.

The Philippine central bank also sees consumer prices to rise faster in the next few years amid low supply.

It pencils in an inflation rate of 4.4% this year, revising upward from its 4.1% estimate the central bank gave last month. Inflation estimates were also raised to 3.3% and 3.2% for 2022 and 2023 from 3.1% forecast for both previously.

Offshore, the Federal Reserve turned hawkish on Wednesday after it signaled it will likely begin winding down its $120-billion monthly bond buying as early as November as long as the US jobs growth through September is “reasonably strong,” Reuters reported.

At the same time, interest rate increases may follow more swiftly than expected as the US central bank’s turn from pandemic crisis policies gains momentum.

“Buying sentiment turned very defensive in the local bond market on Friday after US Treasury rates shot up suddenly after the US Fed’s Open Market Committee meeting,” Mr. Liboro said.

“Somehow, expectations of higher US yields could indirectly drive local yields higher through a stronger dollar and might present some upward pressure on local inflation,” a bond trader said.

After Fed Chair Jerome C. Powell hinted at the November start of the bond-buying taper, “the bond market will continue to anticipate for higher yields moving forward as the US central bank finally acknowledged the need to taper its asset purchase program amid an improving US economy,” the trader said.

For this week’s trading session, Mr. Liboro expects investors to remain defensive heading into the BTr’s 10-year auction on Sept. 28, given the higher movement in global bond yields.

“The 10-year bond auction will set the tone for [this] week…,” he said. “Depending on where the BTr is comfortable awarding, we believe that there is value on the 10-year bond space at 4.5% or higher.”

The Treasury will offer P35-billion reissued 10-year papers — with remaining life of nine years and nine months — on Tuesday with coupon rate of 4%.

For the bond trader, local yields might continue their upward trajectory next week, as the upward revisions in the local inflation projections from the BSP could push yields higher.

“Moreover, likely strong US economic reports on inflation and GDP (gross domestic product) could also reinforce the latest hawkish guidance from the Fed. Some domestic reaction from higher inflation projections by the BSP is also expected to increase bond yields,” the trader added. — Abigail Marie P. Yraola