Yields on government debt end mixed

YIELDS on government securities (GS) ended mixed last week following slower-than-expected inflation in December and the Treasury’s rejection of bids for its offer of reissued seven-year papers.

Bond yields, which move opposite to prices, declined by an average of 4.35 basis points (bps) week on week, based on PHP Bloomberg Valuation Service Reference Rates as of Jan. 7 published on the Philippine Dealing System’s website.

The short end of the curve saw rates fall from their close on Dec. 31. Yields on 91- , 182- and 364-day papers went down by 8.72 bps, 10.7 bps, and 9.71 bps to fetch 1.0073%, 1.1623%, and 1.5626%, respectively.

The belly of the curve was mixed as the rates of two- and three-year Treasury bonds (T-bonds) also declined by 7.69 bps and 1.71 bps to 2.6012% and 3.234%, respectively.

Meanwhile, the four-, five-, and seven-year T-bonds increased by 3.53 bps, 5.48 bps, and 6.9 bps to yield 3.8043%, 4.2514%, and 4.7001%, respectively.

Yields on long-dated papers were likewise mixed. The 10-year paper inched up by 0.35 bps (4.8257%), while 20-year and 25-year notes went down by 12.64 bps (4.9644%) and 12.95 bps (4.9545%).

“Bulk of recent trading activity was concentrated on the front end (one- to three-year tenors) and the liquid on-the-run five-year RTB (retail Treasury bond),” ATRAM Trust Corp. Head of Fixed Income Jose Miguel B. Liboro said in an e-mail interview.

The bond market was “initially more defensive” as the Bureau of the Treasury (BTr) rejected all bids for the reissued seven-year papers earlier last week, he said.

“Continued deceleration in inflation for December 2021…fed buying sentiment which focused on the five-year [bond] despite a move higher in global rates,” Mr. Liboro added.

In a separate e-mail interview, a bond trader noted that government yields fell last week as local participants “generally remained cautious” amid the rising local coronavirus disease 2019 (COVID-19) cases and the threat of the Omicron variant.

The trader added that aside from the lower-than-expected December inflation print, the BTR’s bid rejection “minimized activity in the domestic bond market” last week.

On Tuesday, The Treasury did not accept any tenders for the reissued seven-year bonds, which have a remaining life of six years and seven months, as asking rates became “unreasonably high” despite slower inflation. 

Offers for the paper amounted to P41.42 billion, lower than the P52.267 billion when the bond series was last offered on Dec. 14 which also got rejected during that period.

Had the Treasury fully awarded the bonds, the average yield would have fetched 4.814%, higher by 34.6 bps from 4.468% at the previous offering.

Meanwhile, headline inflation for the month of December eased to its lowest in a year to 3.6% in December from the recorded 4.2% in November as food and transport costs slowed.

Inflation that month was lower than the median 3.9% forecast in a BusinessWorld poll.

The December print brought the full-year average to a three-year high of 4.5%, breaching the 2-4% central bank target band as well as the revised 4.4% forecast.

Meanwhile, Metro Manila and other areas are currently under stricter Alert Level 3 to contain the surge of new infections amid the threat of the highly mutated Omicron variant of the disease.

For this week, the bond trader expects local yields to fetch higher as market waits for the results on the inflation data in the United States, which might bolster for a faster US Federal Reserve tightening with the possible policy rate hike in March.

For his part, Mr. Liboro said market players will take their cues from local catalysts.

“Although we expect global rates to continue to climb gradually higher — impact on local rates is likely to be minimal unless we see sharp spikes higher over the short term,” he said.

As market remains wary of the domestic inflation over the medium term, the December data has calmed sentiment for now, Mr. Liboro said. He added that the market will be focusing on the upcoming auction for the four-year bonds.

“We expect there to be decent interest on the four-year [bonds] with investors opting to focus on five-year and shorter tenors for now.”

The Treasury will offer on Tuesday the reissued five-year papers, with remaining life of four years and two months, worth P35 billion. — Abigail Marie P. Yraola