Yields on government debt rise on key economic data

YIELDS on government securities (GS) climbed last week after the economy grew faster than expected last quarter, which bolstered expectations of further aggressive tightening by the central bank.

Rates on government debt traded at the secondary market rose by an average of 19.41 basis points (bps) week on week, based on the PHP Bloomberg Valuation Service Reference Rates as of Nov. 11 published on the Philippine Dealing System’s website.

Yields at the short end of the curve went up. The 91-, 182-, and 364-day Treasury bills (T-bills) saw their rates rise by 25.35 bps, 8.93 bps, and 17.70 bps to 4.1094%, 4.6397%, and 5.0454%, respectively.

Likewise, rates of papers at the belly of the curve climbed across the board. Yields on the two-, three- four, five-, and seven-year Treasury bonds (T-bond) went up by 7.13 bps (to 6.0571%), 13.60 bps (6.5035%), 17.47 bps (6.8004%), 17.63 bps (7.0151%) and 10.62 bps (7.2659%), respectively.

At the long end of the curve, yields on the 10-, 20-, and 25-year T-bonds increased by 17.41 bps (7.6479%), 26.43 bps (7.812%), and 51.22 bps (7.8828%).

Total GS volume traded reached P12.580 billion on Friday, higher than the P7.325 billion recorded on Nov. 4.

The first bond trader said GS yields increased over the week amid expectations of a robust third-quarter Philippine economic output and strong US data.

“Market participants were largely anticipating the strong local GDP (gross domestic product) report. However, activity was quite limited due to some caution ahead of the US inflation data [last] week,” the first trader said.

Philippine GDP expanded by 7.6% in the third quarter, slightly faster than the revised 7.5% growth in the preceding three-month period and 7% a year earlier. In the nine months to September, GDP averaged 7.7%.

The second bond trader said yields climbed after the US Federal Reserve’s 75-bp rate hike earlier this month and Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla’s statements that they will match the Fed’s move at their meeting this week.

“Given the narrow interest rate differential between the Fed and the BSP, there was some noise about an out-of-cycle hike from the BSP, but given the peso’s performance since the Fed hike, there would be little upside for the BSP to do so and allows it to wait for Nov. 17,” the second bond trader said.

“Market players remain defensive. Even if US inflation came out lower than expected at 7.7% for October and the potential shift in the hike of succeeding Fed hikes spurring a rally in equities and US Treasuries, the fact remains that the BSP will hike by 75 bps [this] week and will likely continue doing so into next year,” the second trader added.

The Philippine central bank will likely raise rates by 75 bps on Thursday to match the Fed’s latest move as it seeks to ensure price stability and support the peso, BSP Governor Felipe M. Medalla said last week.

The BSP has hiked borrowing costs by 225 bps since May, bringing the policy rate to 4.25%, in its fight against rising inflation.

Philippine headline inflation surged to 7.7% in October, its quickest pace in almost 14 years, from 6.9% in September and 4% in October 2021.

For the first 10 months, inflation averaged 5.4%, still lower than the BSP’s 5.6% full-year forecast but higher than its 2-4% target.

Meanwhile, the Fed has hiked by 375 bps since March, bring the federal funds rate to a range between 3.75% and 4%. Markets now expect the Fed to scaling down its tightening as early as next month after US consumer inflation increased by 7.7% annually in October, slower than the 8.2% logged in September.

For this week, both traders said the market will likely remain defensive ahead of the BSP’s policy meeting.

“Local bond yields might tick higher from the BSP rate hike [this] week and potential signals of more local policy rate hikes in the coming months. However, the upside might be capped as recession concerns might be reinforced by downbeat GDP growth reports from Japan and the euro zone,” the first bond trader said.

“In spite of lower US inflation, we have yet to see the same happen to us and the Bureau of the Treasury (BTr) continues to issue bonds on a weekly basis so there’s always fresh supply,” the second bond trader added. — A.M.P. Yraola