Yields go down as Fed resumes its easing cycle
By Pierce Oel A. Montalvo, Researcher
YIELDS on government securities (GS) traded at the secondary market went down across all tenors last week as the market priced in the US Federal Reserve’s first rate cut for this year and expectations of further easing amid signs of weakness in the world’s largest economy.
GS yields, which move opposite to prices, declined by an average of 3.26 basis points (bps) week on week, according to data from the PHP Bloomberg Valuation System Reference Rates as of Sept. 19 published on the Philippine Dealing System’s website.
Yields dropped across the board. At the short end of the curve, yields on the 91-, 182-, and 364-day Treasury bills (T-bills) slid by 14.38 bps (to 4.9458%), 1.67 bps (5.1976%), and 4.90 bps (5.3041%), respectively.
At the belly, the rates of the two-, three-, four-, five-, and seven-year Treasury bonds (T-bonds) went down by 4.18 bps (to 5.5559%), 2.69 bps (5.6533%), 2.28 bps (5.7301%), 2.19 bps (5.7912%), and 2.06 bps (5.8705%), respectively.
At the long end, yields on the 10-, 20-, and 25-year bonds fell by 0.62 bp (to 5.964%), 0.48 bp (6.3445%), and 0.46 bp (6.3445%), respectively.
GS volume traded declined to P43.82 billion on Friday from P46.9 billion the week prior.
Lodevico M. Ulpo, Jr., vice-president and head of fixed-income strategies at ATRAM Trust Corp., said the local market was “broadly constructive” heading into the Fed’s two-day meeting last week.
“Positioning reflected investor confidence that the anticipated rate cut would reinforce the case for extending into the belly of the curve,” Mr. Ulpo said in a Viber message.
“The Fed’s tone has shifted meaningfully. While tariff-related inflation risks remain a watchpoint, the focus has pivoted toward supporting employment amid signs of labor market weakness.
For local markets, this translates into a bias for easier US policy conditions, which in turn anchor expectations of a supportive global rates backdrop for Philippine bonds.”
At Wednesday’s meeting, the Fed lowered its policy rate by 25 bps to a range of 4%-4.25%, its first cut since December, and signaled a gradual easing cycle in response to mounting labor market concerns, Reuters reported.
At the same time, Fed Chair Jerome H. Powell highlighted “a challenging situation” for policymakers, noting that risks to inflation were tilted to the upside and risks to employment to the downside.
The comments dampened market optimism despite a much hoped-for dovish shift after recent data that showed unemployment climbing to 4.3% in August and payrolls growing far less than expected. A steep downward revision to benchmark jobs figures for the year through March also recently added weight to the view that the labor market is losing steam, bolstering the case for multiple rate cuts ahead.
The US central bank’s release on Wednesday of updated quarterly economic projections, including rate forecasts issued in a chart known as the “dot plot,” reflected expectations of more easing this year when compared to the “dots” from the June meeting, with 50 bps in cuts seen before year end.
At the same time, the Fed’s projections still put inflation ending this year at 3%, well above the central bank’s 2% target, while its projection for economic growth was slightly higher at 1.6% versus 1.4%.
Security Bank Vice-President and Head of Fixed Income Dino Angelo C. Aquino said in an e-mail that the Fed cut was seen as hawkish and was “a headwind to the local bond rally.”
“Despite weakening labor market in the US, the tariff impact on inflation remains uncertain — hence, it may add volatility in the short term,” he added.
“The effect of the much awaited 25 bps cut by US Fed has pushed rates lower. Given these developments, this gives the BSP (Bangko Sentral ng Pilipinas) room to cut rates in October to help support growth amid stable inflation,” Jonathan L. Ravelas, a senior adviser at Reyes Tacandong & Co., said in a Viber message.
The BSP lowered benchmark borrowing costs by 25 bps for a third consecutive meeting last month, bringing the policy rate to 5%. It has now delivered cumulative rate cuts of 150 bps since starting its easing cycle in August 2024.
The Monetary Board’s last meetings for the year are scheduled for Oct. 9 and Dec. 11.
The inclusion of Philippine bonds in the positive watchlist for JPMorgan Chase & Co.’s emerging market government bond index also helped drive appetite for securities last week, Mr. Aquino said. “Bonds saw good two-way flows, which were skewed to better buying from both local and foreign flows.”
“Investors are extending duration in anticipation of further policy easing in the months ahead,” Mr. Ulpo added.
For this week, rate-cut expectations will continue to drive GS yields lower, Mr. Ravelas said.
“The immediate focus will be the release of the Bureau of the Treasury’s borrowing program and the upcoming auctions. Strong demand is likely to persist in the T-bill space and the three-year bond auction, which could drive a bull-steepening of the curve as front-end rates drift closer to BSP policy levels. At the long end, performance will remain sensitive to global rate developments, with duration demand reinforced by broad investor positioning and supportive technicals,” Mr. Ulpo said.
There could be some volatility as markets continue to digest the Fed’s decision and statements from its officials over the weekend, Mr. Aquino added.
“The market is expected to see sporadic selling, but expect demand to remain robust.” — with Reuters
