Yield Tracker

By Lourdes O. Pilar, Researcher

YIELDS on government securities (GS) climbed across the board last week as investors turned cautious following the US Federal Reserve’s latest rate hike and after local April inflation print went above market expectations.

GS bond prices dropped as yields rose by a week-on-week average of 15.92 basis points (bps), based on PHP Bloomberg Valuation Service Reference Rates as of May 6 published on the Philippine Dealing System’s website.

The rates at the short end of the curve increased, with the rates of the 91-, 182- and 364-day Treasury bills (T-bills) going up by 1.15 bps, 6.43 bps and 4.91 bps, respectively, to 1.2616%, 1.6243% and 1.9823%.

At the belly, the two-, three-, four-, five-, and seven-year T-bonds saw their yields climbed by 12.05 bps (to 3.5541%), 16.02 bps (4.3102%), 20.43 bps (4.9803%), 25.61 bps (5.5167), and 27.12 bps (5.9926%), respectively.

The long end saw higher movements as the 10-, 20-, and 25-year debt jumped by 13.37 bps, 22.88 bps and 25.10 bps to yield 6.1042%, 6.2836%, and 6.2981%, respectively.

“GS yields continued to drift higher due to surging headline inflation and over the anticipated 50 bps rate hike from the US Fed,” First Metro Asset Management, Inc. (FAMI) said in a Viber interview on Friday.

“Early in the week, sentiment was already defensive due to BTr’s (Bureau of the Treasury) aggressive award on its three-year FXTN 03-27 re-issuance offer — priced at an average rate of 4.598%, +17.3bps from last traded levels,” FAMI added.

The bond trader said that the news of US Fed hike and inflation did not help sentiment for local bonds as yields rose on a week-on-week basis.

“The local bond market had a full plate this past week and more so in the coming days as the results of the Philippine national elections loom and the release of the first-quarter GDP (gross domestic product) print due out on Thursday,” the bond trader said in a Viber message.

The US Fed raised its benchmark overnight interest rate by 50 bps, the biggest rate hike in more than two decades, Reuters reported last week, adding that the 75 bps moves were now unlikely to happen.

The Fed also said it would start next month to trim the roughly $9-trillion stash of assets accumulated during its efforts to fight the economic impact of the coronavirus pandemic as another tool to bring inflation under control.

“We expect other central banks, including the BSP (Bangko Sentral ng Pilipinas), to start with their tightening cycles too,” FAMI said.

On Thursday, inflation heated up in April to more than three-year high of 4.9% amid higher food and utilities prices. April’s print was faster than 4% in March and zoomed past the 4.6% median estimate in a BusinessWorld poll. It also breached the BSP’s 2-4% target this year and settled near the upper band of 4.2-5% forecast that month.

It was the fastest consumer price growth since the 5.2% in December 2018.

A day before the April inflation data was released, the Treasury on Wednesday fully awarded the P35-billion reissued three-year papers with a remaining life of two-years and 11 months at an average rate of 4.598%.

The average yield fetched was 34.8 bps higher than the coupon rate of 4.25% when the papers were first offered on April 8. Accepted yields ranged from 4.3% to 4.85%. Tenders reached P41.49 billion against the P35-billion program.

Meanwhile, a separate BusinessWorld poll conducted late last week showed a first-quarter GDP growth median estimate of 6.7%.

If realized, this would be the slower than the revised 7.8% growth in the fourth quarter, but a turnaround from the 3.8% contraction in the January-March period last year.

The Philippine Statistics Authority will release the GDP report on May 12.

For this week, the bond trader expects that “bearish sentiment for bonds still has legs and that may cause for yields to rise further amid inflation fears and that the BSP may have to step in sooner rather than later.”

FAMI said that the more pressure put for BSP to raise policy rates, yields will likely move higher in the near term.

BSP Governor Benjamin E. Diokno signaled last month the central bank may consider a rate hike in June, when economic output and employment data firmed up.

The central bank has maintained its key rate at record low of 2% since November 2020 to prop up the economy.

US Treasury movements and weekly BTr auctions will also add up to volatility in the bonds market, FAMI said.