Yields jump on hawkish Fed

YIELDS on government securities (GS) mostly rose last week as players turned cautious following the hawkish comments from US Federal Reserve officials, causing bets on more aggressive rate hikes in the next two meetings to tame surging inflation.

Debt yields, which move opposite to prices, went up by an average of 11.63 basis points (bps) week on week, based on the PHP Bloomberg Valuation (BVAL) Service Reference Rates as of April 22 published on the Philippine Dealing System’s website.

At the short end of the curve, only the 91-day Treasury bill (T-bill) saw its yield go down, dropping by 1.93 bps (to 1.2466%) on Friday from its April 13 finish. Meanwhile, yields on the 182-, and 364-day T-bills increased by 2.11 bps (1.5262%) and 11.72 bps (1.9169%), respectively.

The belly of the curve rose, with rates of the two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) climbing by 9.12 bps (to 3.5111%), 13.17 bps (4.2973%), 11.51 bps (4.9004%), 13.11 bps (5.3546%), and 27.56 bps (5.9293%), respectively.

The long end of the curve also moved upwards with yields on the 10-, 20-, and 25-year papers gaining 8.95 bps (to 6.074%), 7.41 bps (5.8066%), and 25.22 bps (5.9068%).

“Local bond yields continued to trend higher [last week] as market players remained cautious amid aggressive US Fed tightening bets and also the likelihood that other central banks will also follow suit,” a bond trader said via Viber message.

The trader said the bond market remained under pressure amid supply chain disruptions due to the renewed lockdown in Shanghai and the ongoing war between Russia and Ukriane.

“Onshore, yields also tracked the result of the seven-year reissuance by the BTr (Bureau of the Treasury) as it was higher than what the market initially expected,” the trader said.

A half-point interest rate increase “will be on the table” when the Federal Reserve meets on May 3-4 to approve the next in what are expected to be a series of rate increases this year, Fed Chair Jerome H. Powell said Thursday in comments that pointed to an aggressive set of actions ahead, Reuters reported.

With inflation running roughly three times the Fed’s 2% target, “it is appropriate to be moving a little more quickly,” Mr. Powell said in a discussion of the global economy at the meetings of the International Monetary Fund.

A Reuters poll two weeks ago showed analysts expect the Fed to make two back-to-back 50-bp interest rate hikes in May and June to bring down runaway inflation.

The Fed’s policy-setting Federal Open Market Committee (FOMC) began to unwind its pandemic-driven easy stance in March when it hiked key rates by 25 bps to tame inflation.

Another bond trader said in an e-mail that the Bangko Sentral ng Pilipinas (BSP) could also make its move soon, depending on the outcome of the Fed meeting in May 3-4.

Finance Secretary Carlos G. Dominguez III, who sits on the Monetary Board (MB), said in a Bloomberg TV interview on Thursday that the Philippines would be monitoring closely the Fed’s decisions before making its own policy adjustments.

BSP Governor Benjamin E. Diokno, MB chairman, earlier said they would start raising its policy rates by the latter half of the year, when they expect the economy to have returned to its pre-pandemic level.

The MB’s next meeting is on May 19.

Meanwhile, the government raised P35 billion as planned from the reissued seven-year papers it offered last week at a higher average rate of 5.779% on higher inflation expectations as well as hawkish comments from Fed officials. The papers have a remaining life of six years and three months

“It (the bond auction’s result) pulled the belly of the curve higher. Some unwinding was seen in the 3.9-year FXTN (fixed-rate Treasury note) 577 and the 4.8-year RTB (retail Treasury bond) 515. It also gave a precedent of higher yields in [this] week’s 10-year auction,” the second bond trader said. 

On Tuesday, The Treasury is set to offer P35 billion in reissued 10-year papers with a remaining life of nine years and eight months. The bonds carry a coupon rate of 4.875% and were originally issued on Jan. 20.

Both traders said they expect the market to remain cautious while waiting for the Fed’s next meeting and for the curve to continue its upward trend in the coming weeks.

“For this week, it seems that there is no sign of reprieve for bonds in the near-term so GS yields are still expected to trade higher, that will be led by securities on the belly to long-end,” the first trader said.

“Outlook is for the FOMC to hike its rates by 50 bps [and] unveil its plans to reduce its balance sheet. Traders are expected to remain cautious even after the meeting unless inflation will show some solid signs that it’s finally slowing,” the trader added.

“Expect defensive trading, some unwind in the bellies,” the second trader said. “Less speculative trades, portfolio names will be the only ones providing support.” — with Reuters