Yields on government debt rise ahead of inflation data
YIELDS on government securities (GS) rose last week on expectations of faster February inflation.
GS yields, which move opposite to prices, went up by an average of 10.41 basis points (bps) week on week, based on PHP Bloomberg Valuation Service Reference Rates as of March 3, published on the Philippine Dealing System’s website.
Rates at the short end of the curve rose, with the 91-, 182-, and 364-day Treasury bills (T-bills) going up by 11.82 bps (to 4.617%), 3.49 bps (5.1764%), and 16.25 bps (5.6089%), respectively.
The belly of the curve also increased, with the rates of the two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) going up by 1.42 bps (to 5.6673%), 0.18 bp (5.8025%), 3.74 bps (5.9454%), 8.47 bps (6.0847%), and 12.81 bps (6.2815%), respectively.
At the long end of the curve, the 10-, 20-, and 25-year debt papers gained 13.18 bps, 20.65 bps, and 22.50 bps to yield 6.4496%, 6.7439%, and 6.758%, respectively.
Total GS volume traded reached P7.773 billion on Friday, lower than the P13.022 billion on Feb. 23.
Yields rose as traders were on the defensive after the Bangko Sentral ng Pilipinas (BSP) said February headline inflation could have reached 9% last month, a bond trader said via e-mail.
“Local yields broadly moved up as the BSP inflation forecast hinted at potentially higher inflation for February and raised expectations of a stronger local policy rate hike this month,” the trader said.
“While local markets were definitely looking forward to the central bank’s estimate, bond yields already increased as the stronger-than-expected PCE (personal consumption expenditures) inflation report in the US,” the trader added.
February inflation likely settled within the 8.5% to 9.3% range, the BSP said last week. This would follow January’s 8.7% print, which was the quickest since November 2008.
If realized, February would mark the 11th straight month that inflation would exceed the BSP’s 2-4% target range.
The upper end of the forecast would also be the fastest headline print recorded in more than 14 years or since the 9.7% recorded in October 2008.
The Philippine Statistics Authority will release the February consumer price index report on March 7, Tuesday.
BSP Governor Felipe M. Medalla said on Friday that the central bank may hike rates by another 50 bps this month if February inflation rises above 9%.
The Monetary Board will hold its second policy meeting for this year on March 23.
At its Feb. 16 review, the BSP hiked benchmark interest rates by 50 bps for a second straight meeting, bringing its key rate to 6%, the highest in nearly 16 years.
The Monetary Board has increased borrowing costs by a total of 400 bps since May 2022 to tame inflation.
Meanwhile, the US PCE price index shot up 0.6% last month after gaining 0.2% in December, prompting hawkish comments from US Federal Reserve officials.
“While the moves of the US central bank might still continue to induce short-term fluctuations in the market, local bond yields are largely seen to be more vigilant about the BSP’s policy moves and domestic inflationary dynamics instead after the BSP decided to un-anchor its moves from the US Federal Reserve last February,” the bond trader said.
A second bond trader also said in a Viber message that expectations of a higher terminal rate in the US have been priced in.
“Bond markets will likely remain defensive with inflation continuing to put pressure on central banks globally, including BSP. As such, BSP will likely counter any moves of the Fed with an equal magnitude of tightening,” the second trader added.
For this week, both traders expect secondary market yields to continue rising due to the February inflation report.
“Yields are likely to move broadly higher [this] week amid expectations of continued uptick in the domestic inflation. A stronger inflation print will give enough room for long-term yields to continue increasing. However, short-term yields might move faster due to potentially stronger rate hike expectations from the BSP,” the first trader said.
“I expect traders to remain defensive in the upcoming weeks as they recalibrate their expectations based on current market outlook,” the second bond trader added. — Bernadette Therese M. Gadon
