Yields on gov’t debt rise on US election, key data

YIELDS on government securities (GS) mostly went up last week following the results of the US election and the release of key domestic economic data.

GS yields, which move opposite to prices, increased by an average of 3.91 basis points (bps) week on week, according to PHP Bloomberg Valuation Service Reference Rates data as of Nov. 8 published on the Philippine Dealing System’s website.

At the short end of the curve, rates were mixed, with the 91-day Treasury bills (T-bills) increasing by 18.11 bps week on week to end at 5.5078%, while the 182- and 364-day T-bills declined by 3.04 bps (to 5.7651%) and 6.41 bps (to 5.7367%), respectively.

At the belly, yields on the two, three, four, five, and seven-year Treasury bonds (T-bonds) climbed by 7.99 bps (5.7217%), 7.32 bps (5.7618%), 6.73 bps (5.7974%), 5.89 bps (5.8197%), 3.89 bps (5.8483%), respectively.

Lastly, at the long end of the curve, rates of the 10-, 20-, and 25-year debt papers went up by 1.28 bps (5.8899%), 0.72 bp (6.0560%), 0.51 bp (6.0530%), respectively.

GS volume traded stood at P45.80 billion on Friday, higher than the P11.95 billion recorded a week prior.

Market players traded cautiously in the early part of the week amid expectations of a close race between Republican Donald J. Trump and Democrat Kamala Harris in the US presidential election, a bond trader said in an e-mail.

“However, after President Trump secured enough electoral votes to warrant his second term in office, local bond yields tracked the substantial upward movement of US Treasuries. This movement was driven by potentially looser US fiscal policy and inflationary risks of the proposed economic policies of former President Trump,” the first trader said.

“Bond yields were higher leading to the US election and results. The market is expecting the Trump administration to be negative for bonds due to the budget deficit,” the second trader said in a Viber message.

Mr. Trump’s return to the White House is expected to usher in fiscally expansive policies that could temper the extent of the Federal Reserve’s future rate cuts, Reuters reported.

The Fed lowered rates by 25 bps at its monetary policy meeting on Thursday, following a jumbo-sized, 50-bp reduction that kicked off its current easing cycle in September.

But the outlook for further rate cuts has been clouded by expectations that key elements of Mr. Trump’s economic platform such as tax cuts and tariffs will lead to faster growth and higher consumer prices. That could make the Fed wary of risking an inflationary rebound by cutting rates too deeply next year, denting expectations that falling borrowing costs could spur a rebound in bonds after a weeks-long selloff.

Treasury yields — which move inversely to government bond prices and tend to follow interest rate expectations — have surged by over 70 bps since mid-September and recently notched their biggest one-month rise since the 2008 global financial crisis, according to UBS Global Wealth Management. The move coincided with Mr. Trump’s improving standing in polls and betting markets throughout October.

Fed funds futures show investors are now expecting rates to decline to about 3.7% by the end of next year from the current 4.5%-4.75% range. That is about 100 bps higher than what was priced in September.

Strategists at BofA Global Research recently shifted their near-term target for Treasury yields to the 4.25% to 4.75% range, from 3.5% to 4.25% previously.

Fed Chair Jerome H. Powell on Thursday declined to speculate on the impact the new US administration will have on monetary policy. He said higher yields were likely more reflective of an improved economic outlook rather than higher inflation expectations. Consumer prices notched their smallest rise in more than 3-1/2 years in September.

Meanwhile, key Philippine economic data released last week caused mixed GS yield movements later in the week, both traders said.

“Traders reacted in mixed directions to the Philippine economic releases last week. While bond yields moved higher in line with the uptick in inflation, this movement has been offset by softer GDP (gross domestic product) report,” the first trader said.

The second trader said these data suggest that the Bangko Sentral ng Pilipinas (BSP) could continue cutting rates, “albeit at a more measured pace.”

Philippine headline inflation picked up to 2.3% in October amid higher food prices, particularly rice, the Philippine Statistics Authority (PSA) reported on Tuesday.

Last month’s consumer price index was faster than 1.9% in September but slower than 4.9% a year ago.

The October print was within the BSP’s 2%-2.8% forecast for the month but slightly below the 2.4% median estimate in a BusinessWorld poll.

Headline inflation averaged 3.3% in the first 10 months, within the BSP’s 2-4% target but slightly above its 3.1% forecast for the year.

Meanwhile, Philippine GDP grew by 5.2% in the third quarter, slower than the upward revised 6.4% expansion in the second quarter and the 6% print in the same period last year, the PSA reported on Thursday.

This was below the 5.7% median forecast in a BusinessWorld poll of 12 analysts.

In the first nine months, economic growth averaged 5.8%, below the government’s 6-7% annual target. The economy now needs to expand by 6.5% in the fourth quarter to meet this goal.

For this week, GS yields may consolidate, both traders said.

“Bond yields are likely to retreat from recent spikes on account of likely softer US consumer and producer inflation reports, as well as downbeat US retail sales data [this] week,” the first bond trader said.

“Yields will remain elevated unless the US bond market resumes its sell-off,” the second bond trader added. — Kenneth H. Hernandez with Reuters