Yields on government debt rise following Powell’s testimony

By Lourdes O. Pilar, Researcher

YIELDS ON GOVERNMENT securities (GS) climbed across the board last week as the market remained cautious after the hawkish remarks from the US Federal Reserve chief.

GS yields, which move opposite to prices, went up by an average of 16.10 basis points (bps) week on week, according to the PHP Bloomberg Valuation Service Reference Rates as of June 23 published on the Philippine Dealing System’s website.

Total GS volume traded reached P5.87 billion on Friday, higher than the P5.3 billion seen on June 16.

The short end of the yield curve ended higher last week as rates of the 91-, 182-, and 364-day Treasury bills rose by 19.45 bps, 6.61 bps, and 8.46 bps, respectively, to 6.0886%, 6.0958%, and 6.1301%.

The belly of the curve climbed as yields on the two-, three-, four, five-, and seven-year Treasury bonds (T-bonds) went up by 25.84 bps (6.2054%), 26.57 bps (6.1618%), 24.03 bps (6.1109%), 19.79 bps (6.0726%), and 12.61 bps (6.0865%), respectively.

At the long end, the rates of the 10-, 20- and 25-year debt increased by 11.23 bps (6.1876%), 10.82 bps (6.1760%), and 11.74 bps (6.1865%).

Investor sentiment was primarily hinged on the Fed Chair Jerome H. Powell’s reiteration of the potential need for additional interest rate increases this year, Robinsons Bank Corp. peso fixed-income trader Kevin S. Palma said in an e-mail.

“As a result, yields on US Treasuries exhibited upward bias, which was reflected in the movement of peso bonds. Market players remained cautious, resulting in a week-on-week increase in yields on peso bonds, given the hawkish stance of the US Fed,” Mr. Palma said.

Mr. Powell said on Thursday the central bank would move interest rates at a “careful pace” from here as policy makers edge towards a stopping point for their historic round of monetary policy tightening, Reuters reported.

“We’re at least close to where we think our destination is… and it only makes common sense to move… at a careful pace,” Mr. Powell said at a hearing before the Senate Banking Committee.

“The point” of holding rates steady at 5-5.25% at the Fed’s last meeting, Mr. Powell said, was precisely to slow the speed with which the Fed was raising borrowing costs.

After having raised rates at 10 straight meetings, sometimes by as much as three quarters of a point at a time, the Fed skipped the June meeting. Investors now expect rate hikes to resume in July, with the Fed perhaps evaluating the need for further increases at every other session — a pace common in prior tightening cycles.

“Weak demand for the reissued six-year FXTN (fixed rate Treasury note) 7-67 auction set the tone for the market at the start of the week,” ATRAM Trust Corp. Chief Investment Officer Alessandra P. Araullo said in a Viber message.

The government last week raised P25 billion as planned from its offer of reissued seven-year bonds that have a remaining life of five years and 11 months, with total bids reaching P36.639 billion.

Rates awarded ranged from 5.975% to 6.15%, bringing the average yield for the bonds on offer to 6.907%, down by 7.5 bps from the 6.172% average and by 40.3 bps from the 6.5% coupon fetched for the series when it was first offered on Feb. 28.

“The decision made by the BSP (Bangko Sentral ng Pilipinas) was widely expected and factored into the market, resulting in minimal impact on the movement of government securities,” Mr. Palma added.

“Overall, market participants have maintained a cautious stance in response to the hawkish sentiment of the US Fed because given also the interconnectivity of the global economy, the potential implications of a narrower interest rate differential may not be ignored,” he said.

The BSP kept benchmark interest rates unchanged for a second straight meeting on Thursday, and signaled policy easing is unlikely in the near term.

At its fourth policy meeting for the year, the Monetary Board maintained its overnight reverse repurchase rate at 6.25%, as expected by 15 economists in a BusinessWorld poll.

Interest rates on the overnight deposit and lending facilities were also left unchanged at 5.75% and 6.75%, respectively.

For this week, both analysts expect the market to remain defensive.

“This will be contingent upon various events and data releases, such as the BTr’s (Bureau of the Treasury) nine-year FXTN reissuance and the announcement of the borrowing plan for July,” Mr. Palma said.

“Market participants will also be looking at the BSP’s inflation forecast for June, along with a plethora of upcoming US data releases, from which traders and investors can glean insights into the possible direction of interest rates ahead,” he added.

Ms. Araullo expects yield to go sideways to higher.

“The nine-year auction results this week and the BSP’s release of their inflation indicative range for June should give further direction to yields,” she said.

The government is offering P25 billion in reissued 10-year bonds with a remaining life of nine years and two months on Tuesday. — with Reuters