Gov’t debt yields mixed on BSP, Fed easing bets

YIELDS on government securities (GS) ended mixed last week on expectations of rate cuts from the Bangko Sentral ng Pilipinas (BSP) and the US Federal Reserve in the coming months.

Yields, which move opposite to prices, went down by an average of 1.61 basis points (bps) week on week, data from the Bloomberg Valuation Service Reference Rates as of Aug. 22 published on the Philippine Dealing System’s website showed.

Rates at the short end went down, with the 91-, 182-, and 364-day Treasury bills (T-bills) dropping by 2.56 bps (to 5.9247%), 5.93 bps (6.0559%), and 4.51 bps (6.1038%), respectively.

Meanwhile, at the belly of the curve, yields went up across all tenors. The two-, three-, four-, five-, and seven-year Treasury bonds (T-bond) saw their rates rise by 1.52 bps (to 6.0165%), 1.9 bps (6.0177%), 2.33 bps (6.0244%), 2.67 bps (6.0335%), and 2.86 bps (6.0492%), respectively.

Lastly, at the long end, yields mostly went down as the 20- and 25-year debt papers fell 8.83 bps and 8.73 bps to fetch 6.1780% and 6.1773%, respectively. On the other hand, the rate of the 10-year T-bond inched up 1.53 bps to 6.0735%.

GS volume traded fell to P43.32 billion on Thursday, down from P55.79 billion on Aug. 16.

Philippine financial markets were closed on Aug. 23 for a special non-working holiday in observance of Ninoy Aquino Day. They will remain closed on Aug. 26 (Monday) for the National Heroes’ Day holiday.

Last week’s GS yield movements were driven by prospects of rate cuts by the BSP and Fed, Jonathan L. Ravelas, senior adviser at Reyes Tacandong & Co., said in a Viber message.

“While the immediate impact of [the BSP’s Aug. 15] rate cut has diminished, the market remains optimistic about further reductions in local policy rates through the end of 2024. This positive outlook is reflected in the increased market activity, with average daily trading volumes in the GS space rising by P15-20 billion since the rate cuts were factored in,” Alessandra P. Araullo, chief investment officer at ATRAM Trust Corp., said in a Viber message.

“Given that the BSP often aligns its policy rate decisions with the Fed to maintain a favorable rate differential, the dovish guidance from the Fed bolstered sentiment among local market participants, particularly in the GS space,” Ms. Araullo said.

The dovish stance of both central banks spurred market participants to invest in longer duration bonds, she added.

The BSP on Aug. 15 reduced its target reverse repurchase rate by 25 bps to 6.25%, in line with the expectations of nine out of 16 analysts in a BusinessWorld poll. Prior to the cut, the Monetary Board kept the policy rate at an over 17-year high of 6.5% for six straight meetings following cumulative hikes worth 450 bps between May 2022 and October 2023 to rein in elevated inflation.

BSP Governor Eli M. Remolona, Jr. said they could cut rates by another 25 bps within the year. The Monetary Board’s remaining policy-setting meetings this year are on Oct. 17 and Dec. 19.

Analysts also expect the BSP’s easing cycle to continue until next year amid stabilizing inflation, with at least 100 bps in rate cuts seen in 2025.

Meanwhile, Fed Chair Jerome H. Powell on Friday endorsed an imminent start to interest rate cuts, saying further cooling in the job market would be unwelcome and expressing confidence that inflation is within reach of the US central bank’s 2% target, Reuters reported.

“The time has come for policy to adjust,” Mr. Powell said in a highly anticipated speech to the Kansas City Fed’s annual economic conference in Jackson Hole, Wyoming. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

Analysts and financial markets had already widely expected the Fed to deliver its first rate cut at its Sept. 17-18 policy meeting, a view that was cemented after a readout of the central bank’s July meeting said a “vast majority” of policy makers agreed the policy easing likely would begin next month.

Most analysts have forecast the Fed will kick off its policy easing with a quarter-percentage-point rate reduction, the central bank’s usual increment.

Mr. Powell’s new emphasis on protecting the job market raises the chance of a bigger cut, especially if the US government’s jobs report for August, due to be released on Sept. 6, shows further deterioration in what many policy makers have called a still-healthy job market.

With its policy rate currently in the 5.25%-5.5% range, the Fed has “ample room” to reduce borrowing costs to cushion the economy, Mr. Powell said.

For this week, Mr. Ravelas expects GS yields to continue moving sideways.

“[This] week’s focus will be on the upcoming 20-year government bond auction, presenting an opportunity to extend duration if the positive market sentiment persists,” Ms. Araullo said, adding that Mr. Powell’s remarks over the weekend would also be a main trading driver.

On Wednesday, the government will auction off P25 billion in reissued 20-year bonds with a remaining life of 19 years and nine months. — Karis Kasarinlan Paolo D. Mendoza with Reuters