Debt yields rise on price fears, hawkish BSP signals

YIELDS on government securities rose last week as investors pulled back amid mounting inflation concerns and expectations that the central bank might tighten policy in response to surging oil prices.

Market sentiment turned cautious as the conflict in the Middle East pushed crude prices higher, raising the risk of faster inflation and eroding appetite for fixed-income assets. This led investors to demand higher returns, driving yields up across the curve while trading activity thinned.

A bond trader said the market remained defensive, with participants reacting to developments in the conflict and its impact on global oil prices and US Treasury yields.

“With the war continuing, upward pressure on yields will likely continue,” the trader said, noting that investors were closely watching both geopolitical developments and policy signals from major economies.

The sell-off was broad-based, with yields rising from short-term Treasury bills to longer-dated bonds, reflecting expectations that inflationary pressures could be sustained over the medium term.

Analysts said the sharper increases at the belly and long end of the curve suggest investors are pricing in prolonged uncertainty and higher borrowing costs.

Finance Secretary and Monetary Board member Frederick D. Go said the central bank might be forced to raise interest rates if oil prices remain elevated, reinforcing expectations of a policy shift.

Bangko Sentral ng Pilipinas Governor Eli M. Remolona, Jr. has also signaled that policymakers are prepared to act if energy-driven price pressures spill over into broader inflation.

Economist Marco Antonio C. Agonia said market participants appear to be factoring in higher inflation, with selling pressure particularly evident in medium- to long-term bonds, which are more sensitive to interest rate expectations.

“Market participants appear to be pricing in higher inflation over the medium term,” he said, adding that even typically stable long-term tenors had significant yield increases.

Weak demand was also evident in recent government auctions, in which the Bureau of the Treasury partially awarded bills despite strong bid volumes, as it rejected offers seeking higher yields. This reflects a widening gap between investor expectations and the government’s preferred borrowing costs.

“With risk-off sentiment still dominating headspace, both auctions and secondary trading saw relatively thinner volumes compared with before the conflict,” Mr. Agonia said.

The peso’s depreciation has added to the pressure, as a weaker currency fuels imported inflation and reduces the appeal of peso-denominated assets to foreign investors.

Some market participants said global funds might have trimmed exposure to emerging markets amid heightened geopolitical uncertainty.

Despite occasional bursts of activity driven by headlines on the conflict or movements in global markets, overall trading volumes remained subdued, suggesting investors are waiting for clearer signals on inflation and monetary policy.

Analysts expect yields to remain elevated or trend higher in the near term, with market direction largely dependent on developments in oil prices and the trajectory of the Middle East war. — Isa Jane D. Acabal