Yields on government debt climb ahead of US Fed hike

By Bernadette T.M. Gadon, Researcher

YIELDS on government securities (GS) continued to soar last week in the run-up to the US Federal Reserve’s policy meeting where it raised rates from near-zero to help quell inflation.

Debt yields, which move opposite to prices, went up by an average of 15.81 basis points (bps) week on week, based on the PHP Bloomberg Valuation (BVAL) Service Reference Rates as of March 18 published on the Philippine Dealing System’s website.

At the short end of the curve, yields on 91-, 182-, and 364-day Treasury bills (T-bills) picked up on Friday compared with March 11 by 6.43 bps (to 1.2005%), 14.34 bps (1.4172%), and 9.09 bps (1.7486%), respectively.

The belly of the curve likewise climbed as the rates of the two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) rose by 17.2 bps (to 3.3996%), 19.87 bps (4.0314%), 22.33 bps (4.6019%), 24.48 bps (5.0551%), and 24.78 bps (5.48%), respectively.

The long end of the curve also continued its upward trend, with yields on the 10-, 20-, and 25-year T-bonds gaining 8.45 bps (to 5.5646%), 12.87 bps (5.5433%), and 14.12 bps (5.5345%).

“A large part that affected the yield curve [last] week was the uncertainty towards the FOMC (Federal Open Market Committee) meeting this week,” a bond trader said in an e-mail, referring to the policy-making body of the US central bank.

“It also did not help that the BTr (Bureau of the Treasury) partially awarded the four-year FXTN (fixed-rate Treasury notes) 577 at a high yield, which shows their strong inclination to borrow at any cost,” the trader said.

The trader said yields on government debt “normalized” after the Fed meeting.

“We believe that this will be well-communicated throughout the year and markets should be able to adjust accordingly,” the trader said.

As widely expected, the Fed decided to hike rates last week by 25 bps for the first time since 2018, Reuters reported. It also signaled more tightening to come as it projects its key rates to range from 1.7% to 2% by end of the year and 2.8% next year to combat rising inflation.

Meanwhile, the government partially awarded the reissued T-bonds it offered on Tuesday as investors asked for higher yields in anticipation of the Fed’s rate hike.

The Bureau of the Treasury (BTr) raised just P13.035 billion via the reissued five-year T-bonds it auctioned off on Tuesday, less than the programmed P35 billion, even as the offering attracted P35.305 billion in bids.

The debt papers, which have a remaining life of four years and 23 days, were awarded at an average rate of 4.669%, up by 58 bps from the 4.089% quoted when the series was last offered on Feb. 3.

“The noticeable increase in long-term yields indicated that the Russia-Ukraine conflict continue to influence domestic inflationary concerns, specifically on the impact of the conflict on commodity prices,” another bond trader said in an e-mail.

Recent auctions have been “notably timid” amid uncertainties over the economy’s recovery from the pandemic, the second trader added.

For the week, analysts said yields will continue to rise ahead of the Bangko Sentral ng Pilipinas’ policy meeting on March 24 and the BTr’s return to the English auction format, where there is a suggested opening bid. It previously conducted its fundraising activities via Dutch auctions, where offers start at the highest price and lowered until a price is accepted.

“Notice that the BTr opted to do an English auction via reissuance so it could secure itself some awards instead of the twice rejected Dutch auction for the supposedly new seven-year FXTN 766. Indicative yield for the 6.4-year FXTN 765 is at 5.40%-5.65%,” the first trader said.

The government will offer reissued seven-year bonds with a remaining life of six years and four months worth P35 billion on March 22.

“Investors should be wary of incoming debt supply for March and the release of the April borrowing schedule [two] weeks from now. BSP MB (Monetary Board) meeting should be neutral with assurance that inflation won’t stray too much,” the first trader added.

“Market participants, especially on the bond markets, are highly expected to be on the lookout for the shape and flattening of the US Treasury yield curve from the combined effect of aggressive monetary policy on the short end and dimming optimistic over the global economy as reflected by the long end of the yield curve,” the second trader said.

“Local yields might move higher from expectations of hawkish signals ahead of the BSP policy meeting amid rising local inflationary risks. Yields might likewise increase from the impact of the highly hawkish Fed policy meeting this week,” the second trader added. — with Reuters