Yield Tracker

YIELDS on government securities (GS) climbed last week after the Bangko Sentral ng Pilipinas’ (BSP) off-cycle move to raise benchmark interest rates by a hefty 75 basis points (bps).

GS bond prices dropped as yields rose by an average of 10.35 bps week on week, based on PHP Bloomberg Valuation Service Reference Rates as of July 15 published on the Philippine Dealing System’s website.

Local GS yields increased almost across the board week on week on Friday except that on the 10-year papers, which declined by 12.98 bps to 6.7941%.

The rates at the short end of the curve went up, with the rates of the 91-, 182- and 364-day Treasury bills increasing by 8.98 bps, 21.96 bps, and 17.81 bps, respectively, to 1.9413%, 2.6167%, and 2.8709%.

At the belly, the two-, three-, four-, five-, and seven-year Treasury bonds saw their yields climb by 11.31 bps (4.6844%), 1.26 bps (5.273%), 0.48 bp (5.7306%), 7.01 bps (6.0663 %), and 5.17 bps (6.4880%), respectively.

Likewise, the 20- and 25-year debt jumped by 15.35 bps and 37.50 bps week on week to fetch 6.8404% and 6.8347%, respectively.

GS volume traded narrowed to P5.039 billion on Friday from P8.313 billion seen on July 8.

“GS yields increased following the off-cycle 75-bp rate hike announced by the BSP last week,” a bond trader said in an e-mail on Friday.

Despite the unexpected timing of the rate hike, its immediate effect on GS yields was muted as market participants deemed this as appropriate, the bond trader said.

“Market rates have not reflected the substantial rate hike immediately, but it could accelerate the increasing trend in short-term interest rates since the surprise move signaled that the BSP has turned aggressive in utilizing its key policy rates to arrest growing inflation worries,” said the bond trader.

“Yields likewise rose from growing market views of at least a 75-bp rate hike from the US Federal Reserve from the latest release of strong labor and inflation reports in June 2022,” the trader added.

The central bank, in a surprise move on Thursday, announced an immediate massive 75-bp hike in benchmark rates to help fight surging inflation. It was the largest increase on record and was the BSP’s first off-cycle action since April 16, 2020.

Headline inflation climbed to a near four-year high of 6.1% in June. This brought the first-half average to 4.4%, above the BSP’s 2-4% target but lower than its 5% forecast for this year.

Meanwhile, consumer inflation in the US surged by 9.1% in June, the largest in over four decades or since November 1981, bolstering bets that the Fed would raise interest rates by another 75 bps on July 26-27.

The bond trader expects local yields to continue moving up this week, still due to the BSP’s surprise rate hike and as expectations of elevated inflation reports from the euro zone and Japan may cause global monetary policy makers to be hawkish.

“However, potentially downbeat US housing and manufacturing reports could exert some downward pressure on bond yields,” the trader said.

UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said he also expects the market to monitor the results of this week’s 10-year bond auction.

“Our traders expect the 10-year peso bond auction could fetch a rate between 6.9%-7.05% on upbeat demand consistent with secondary market bids for the same bond [in the previous] week,” he said.

On Tuesday, the Bureau of the Treasury will offer P35-billion reissued 10-year bonds with a remaining life of nine years and 11 months. — L.O. Pilar