Debt yields mixed on hawkish Fed

YIELDS on government securities (GS) ended mixed last week due to hawkish statements from US Federal Reserve officials and ahead of the release of likely above 5% local inflation print for May, which could build the case for the central bank to raise benchmark rates anew this month.

Debt yields, which move opposite to prices, increased by an average of 3.23 basis points (bps) week on week, based on the PHP Bloomberg Valuation (BVAL) Service Reference Rates as of June 3 published on the Philippine Dealing System’s website.

Yields ended mixed across the board on Friday, with the short end of the curve seeing some increases. The rate of the 364-day Treasury bill (T-bill) rose by 18.02 bps to 2.2203%, while that of the 182-day T-bill climbed by 4.17 bps (1.8098%). Meanwhile, the 91-day paper dipped by 0.69 bp week on week to 1.4464%.

On the other hand, tenors in the belly of the curve mostly edged lower, except for the two-year debt, whose yield increased by 1.74 bps to 4.1414%. Rates of the three-, four-, five-, and seven-year Treasury bonds (T-bonds) decreased by 0.15 bp (to 4.8106%), 0.78 bp (5.3559%), 3.65 bps (5.7658%), and 4.19 bps (6.3108%), respectively.

Meanwhile, the end of the curve moved upwards as yields on the 10-, 20-, and 25-year papers gained 3.24 bps (to 6.7312%), 9.08 bps (6.702%), and 8.74 bps (6.7097%).

GS volume reached P13.58 billion on Friday, slightly thinner than P13.677 billion seen on May 27.

A bond trader said in a Viber message that market players were defensive last week due to continuous hawkish rhetoric from the Fed officials, the depreciation of the peso against the US dollar, and a likely “hot” Philippine May inflation print.

“[M]arket players traded defensively. Bear sellers took the chance to reduce bond holdings and capitalized every time bargain hunters are present,” the trader said.

The Fed plans to hike rates aggressively for the rest of the year to control inflation and with the labor market showing recovery, Reuters reported. It has raised borrowing costs by a cumulative 75 bps.

St. Louis Federal Reserve Bank President James Bullard last week said that while rate hikes from the previous months seemed to help tame inflation, the Russia-Ukraine conflict and the China lockdown’s effects can still overturn the progress.

Amid this uncertainty, Fed Governor Christopher J. Waller said he backs more 50-bp hikes in the coming months.

“I am not taking 50-basis-point hikes off the table until I see inflation coming down closer to our 2% target,” he said in his speech last May 30 at the Institute for Monetary and Financial Stability in Frankfurt, Germany.

Similarly, in the Philippines, the Bangko Sentral ng Pilipinas (BSP) and analysts expect May headline inflation to have breached 5% amid higher fuel and food prices.

A BusinessWorld poll of 16 analysts held last week yielded a median estimate of 5.4% for May inflation, matching the midpoint of the BSP’s 5% to 5.8% estimate.

If realized, this would be faster than the 4.9% in April and the 4.1% print in May 2021. This would also be well above the central bank’s 2-4% target for the year.

Headline inflation last hit the 5% level in December 2018 and stood at 5.2% that month.

The Philippine Statistics Authority will release the May inflation data on Tuesday, June 7.

BSP Governor Benjamin E. Diokno last month said the central bank is likely to raise key interest rates by another 25 bps at its next policy review on June 23 following a hike of the same magnitude at its May 19 meeting to curb growing inflationary pressures.

At the May meeting, the central bank upwardly revised its average inflation forecast for 2022 to 4.6% from the previous forecast of 4.3%, above the 2-4% target band. For 2023, the BSP’s inflation forecast was hiked to 3.9% from 3.6% previously.

For this week, analysts said May inflation data will drive trading as this could cement expectations of another hike at the BSP’s policy meeting this month.

“[The] direction of yields could move generally higher across the curve for the week as inflation and the forecast hikes will continue to weigh on investor sentiment,” the first bond trader said.

“Although BSP projected that inflation will fall between 5% and 5.8%, the implication of a hike in June has already been made by both outgoing and incoming BSP governors,” the second bond trader said in a Viber message.

“We’ll likely keep an eye on the continuing increase of local debt and how the BTr (Bureau of the Treasury) will manage its upcoming auctions to meet its borrowing targets,” a second bond trader added. — Bernadette Therese M. Gadon with Reuters