Yields end mixed on US economic data

YIELDS on government securities (GS) ended mixed last week following the release of data that caused US benchmark rates to rise and after the Bangko Sentral ng Pilipinas (BSP) continued its easing cycle with a 25-basis-point (bp) rate cut.

GS yields, which move opposite to prices, went down by an average of 1.76 bps week on week, data from the Bloomberg Valuation Service Reference Rates as of Oct. 18 published on the Philippine Dealing System’s website showed.

Rates at the short end of the curve went up, with the 91-, 182-, and 364-day Treasury bills (T-bills) jumping by 10.68 bps (to 5.1499%), 13.67 bps (5.5836%), and 7.6 bps (5.6926%), respectively.

On the other hand, yields at the belly mostly went down. The two, three-, four-, and five-year Treasury bonds (T-bonds) saw their rates fall by 5.32 bps (to 5.5068%), 3.96 bps (5.5616%), 1.81 bps (5.6118%), and 0.09 bp (5.6495%), respectively. Meanwhile, the seven-year debt inched up by 1.51 bps to yield 5.7025%.

At the long end, the rate of the 10-year T-bond inched up by 0.61 bp to 5.7378%, while yields on the 20- and 25-year papers went down by 1.77 bps and 1.81 bps to 5.9037% and 5.9034%, respectively.

The BSP’s policy decision was mostly already priced in by the market and had a minimal effect on GS yield movements, the first bond trader said in a Viber message.

“Better-than-expected US economic data drove US yields higher, prompting further defensiveness in the local market,” the trader said.

“Yields seem to be range-bound at the moment as US yields remain elevated and continue to put external pressure on market sentiment. However, local fundamentals remain intact as the BSP is expected to continue its easing cycle while inflation is expected to remain benign for the rest of the year,” the trader added.

The second trader said in a Viber message that GS yields were mostly trading well below the BSP’s policy rate prior to Wednesday’s Monetary Board meeting, so there was no more room for a further drop.

US retail sales increased solidly in September likely as lower gasoline prices gave consumers more money to spend at restaurants and bars, supporting the view that the economy maintained a strong growth pace in the third quarter, Reuters reported.

The slightly stronger-than-expected rise in sales reported by the Commerce department on Thursday also reflected sharp increases in receipts at clothing store outlets as well as miscellaneous store retailers. Consumers boosted online purchases and spent more at health and personal care stores.

Spending and the overall economy are being underpinned by solid income growth, ample savings as well as strong household balance sheets. Though labor market momentum has slowed, layoffs remain historically low, supporting wage gains.

Signs of the economy’s resilience likely will not discourage the Federal Reserve from cutting interest rates again next month, but will cement expectations for a smaller 25-basis-point reduction in borrowing costs.

Retail sales rose 0.4% last month after an unrevised 0.1% gain in August, the Commerce Department’s Census Bureau said. Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, would rise 0.3%. Estimates ranged from no change to an increase of 0.8%.

Retail sales advanced 1.7% on a year-on-year basis in September. Gasoline prices dropped by about 12 cents per gallon between August and September, data from the US Energy Information Administration showed.

On Thursday, US Treasury yields gained ground after the retail sales data suggested the US economy is on solid footing, but left the Fed with enough room to move forward on a slower path to lower rates.

The yield on benchmark US 10-year notes rose 7.7 bps to 4.093% from 4.016% late on Wednesday.

The 30-year bond yield rose 9.3 bps to 4.3924% from 4.299% late on Wednesday.

The 2-year note yield, which typically moves in step with interest rate expectations, rose 4.3 bps to 3.978% from 3.935% late on Wednesday.

Meanwhile, the BSP on Wednesday cut benchmark interest rates by 25 bps amid manageable inflation, bringing its policy rate to 6%.

The Monetary Board has now lowered borrowing costs by a total of 50 bps since it began its easing cycle in August with a 25-bp cut.

BSP Governor Eli M. Remolona, Jr. said they could deliver a 25-bp cut at the Monetary Board’s last meeting for the year on Dec. 19, which would bring the policy rate to 5.75% by end-2024. He added that a 50-bp reduction in December would be “too aggressive a cut” and would only be possible in a hard-landing scenario.

For 2025, Mr. Remolona said they could slash borrowing costs by 100 bps.

The second trader said the BSP chief’s dovish comments could result in “softer buying interest as this dampens the prospect of more aggressive rate cuts.”

For this week, GS yields may continue to rise, the first trader said.

“We could see a slight upward bias in terms of yields [this] week, though we expect the market to remain range-bound with local fundamentals remaining strong and the BSP’s 250-bp reserve requirement ratio (RRR) cut becoming effective at the end of next week,” the first trader said.

The BSP will reduce the RRR for universal and commercial banks and nonbank financial institutions with quasi-banking functions by 250 bps to 7% from 9.5% effective on Oct. 25.

It will also cut the RRR for digital banks by 200 bps to 4%, while the ratio for thrift lenders will be reduced by 100 bps to 1%. Rural and cooperative banks’ RRR will likewise go down by 100 bps to 0%.

“Yields will be supported by less bond issuances but may face upward pressure, especially those with tenors of seven years and longer,” the second trader added. — Karis Kasarinlan Paolo D. Mendoza with Reuters