Debt yields drop on May inflation data

YIELDS on government securities (GS) mostly went down last week as Philippine inflation picked up at a slower pace than expected last month.

Yields, which move opposite to prices, fell by an average of 2.73 basis points (bps) week on week, according to data from the PHP Bloomberg Valuation Service Reference Rates as of June 7 posted on the Philippine Dealing System website.

Rates at the short end were mixed, with the rate of the 91-day Treasury bill (T-bill) going down by 3.18 bps to 5.7038%. Meanwhile, yields on the 182- and 364-day T-bills went up by 4.07 bps and 1.61 bps to 6.0003% and 6.0814%, respectively.

At the belly of the curve, yields on the two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) went down by 2.65 bps (to 6.2818%), 4.05 bps (6.3418%), 5.09 bps (6.3992%), 5.7 bps (6.4564%), and 6.27 bps (6.5645%), respectively.

At the long end, the 10-, 20-, and 25-year debt papers dropped by 5.69 bps (to 6.6947%), 0.32 bp (6.8254%), and 2.78 bps (6.8141%), respectively.

GS volume traded rose to P14 billion on Friday from P12.51 billion on May 31.

Analysts attributed the mostly lower GS yields last week to softer-than-expected May inflation.

“The May inflation was a surprise to the downside as market expectations were at 4% and the 3.9% figure was on the lower end of BSP’s (Bangko Sentral ng Pilipinas) expected range.

Although it was at a six-month high, it was mostly expected to spike until July due to base effects,” a bond trader said in a Viber message.

The Philippine consumer price index (CPI) accelerated to a six-month high of 3.9% in May from the 3.8% pace in April, the government reported last week.

Still, this was slower than the 6.1% in May last year. This was also within the BSP’s 3.7-4.5% forecast fro the month and was a tad lower than the 4% median estimate in a BusinessWorld poll of 16 analysts.

“Yields were still lower for the week as they tracked the movements in US Treasury (UST) yields and was instead spurred on by the inflation print,” the bond trader added.

“UST yields [moving] lower reflect market pricing in Federal Reserve rate cuts as well, so that means easier for BSP to deliver on their own projected cuts,” a second bond trader added.

On Thursday, benchmark 10-year US Treasury yields were a touch higher at just over 4%, although that was still near their lowest in two months, after data this week hinted that the US labor market is finally cooling.

That included private US payrolls on Wednesday and a report on Tuesday that showed job openings fell in April to the lowest in more than three years.

However, on Friday, surprisingly strong US monthly jobs data dimmed hopes that the Federal Reserve would soon follow euro zone and Canadian interest rate cuts, causing Treasury yields to shoot higher.

The world’s largest economy added 272,000 jobs last month, beating the 185,000 hires predicted by economists and derailing an investor consensus that the jobs market had slackened just enough to push consumer prices lower.

The benchmark 10-year US Treasury yield, a benchmark for borrowing rates globally, leapt over 15 bps after the jobs report, to 4.4335%, its biggest one-day jump in about two months.

The two-year yield, which tracks interest rate expectations, climbed nearly 17 basis points to 4.8868%, following six straight days of declines until Thursday. Bond yields rise as prices fall.

Money market pricing just after the payrolls data implied traders saw the Fed only starting to cut rates from their 23-year high of 5.25-5.5% by November. US interest rate futures also lowered the chances of the Fed’s cutting rates by 25 basis points in September to 56%, down from around 70% on Thursday, according to LSEG’s Fedwatch.

For this week, the bond traders said GS yield movements will depend on the latest US jobs data released on Friday.

“Market will react to the [non-farm payrolls] figure from the US and its consequent effect on rate cut expectations by the Fed. While the BSP has stated that it can reduce ahead of the Fed, it is unlikely to do so given the potential effects on the peso-dollar exchange rate,” the first bond trader said. — Karis Kasarinlan Paolo D. Mendoza with Reuters