Yield Tracker

By Ranier Olson R. Reusora,

TRADING in the local government securities (GS) showed limited movement last week as investors remained cautious over lack of leads, but a late rally brought yields up amid several key developments in the US late last week.

Local debt yields, which move opposite to prices, climbed 9.91 basis points (bps) on average week on week, data from the Philippine Dealing & Exchange (PDEx) data as of Oct. 20 showed.

“GS yields increased this week due to three main factors: expectations of a hawkish replacement for US Federal Reserve Chair Janet Yellen, bets of some tightening moves from the European Central Bank (ECB) [this] week, and positive developments on the US tax reform,” said Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines (Landbank).

For Ruben Carlo O. Asuncion, Union Bank of the Philippines (UnionBank) chief economist, he said: “The increase in yields were mainly driven by [Friday’s] movement, with minimal trading volumes.”

“Comparable to last week, investors remained on the sidelines while waiting for significant leads. The cautiousness has been likely driven by the uncertainty on US President Donald Trump’s pick for the Federal Reserve Chair,” he added.

Last week, Mr. Trump concluded interviews for five candidates to become the next Fed Chair to replace Ms. Yellen, who will end her first term in February next year.

According to news reports, leading the race to possibly become the next chair is Federal Reserve Governor Jerome Powell, who was seen as the most similar to Yellen in terms of policy making. Mr. Powell, a Republican, has been in the Fed’s Board of Governors since 2012.

Meanwhile, the local market also tracked movements in the US Treasury as the decision nears for appointing the next Fed chair which affected movements in the US Treasury bonds. The US treasury fell on the news of the high possibility of Mr. Powell being named the next chair.

However, US Treasury rallied late last week as the Senate passed a budget last Friday strengthening the hopes of success from the Trump administration in pushing the tax reform measures.

A bond trader also noted last Friday that traders “remained wary” of domestic inflation coupled with supply risk from the announced Marawi rebuilding bonds.

The Marawi bond, which was announced by Finance Secretary Carlos G. Dominguez III in August, said the plan involves raising as much as P30 billion through “patriotic” bonds and will have a 20-year tenor.

The government plans to sell the 20-year bonds in early January to help rebuild the war-torn Marawi City.

At the secondary market last Friday, papers from the seven-year Treasury bonds increased the most, climbing by 40.91 bps (to fetch 4.7368%). It was followed by the 91-day Treasury bills, which increased by 38.76 bps (2.4375%).

Yields on papers of three-, five- and four-year papers also increased, respectively, by 9.68 bps (4.1104%), 8.22 bps (4.6504%), and 4.03 bps (4.5271%), while papers on 10-year and 364-day tenors went almost flat at 0.87 and 0.04 basis point, to respectively fetch 4.6431% and 2.8511%.

On the other hand, the 182-day, two-year and 20-year papers went down by 2.43 bps (2.7589%), 0.42 basis point (3.8446%), and 1.36 bps (5.1434%), respectively.

Sought for his outlook for this week’s trading, Mr. Dumalagan said: “GS yields might move sideways [this] week due to likely mixed signals abroad.”

“Push factors include expectations of hawkish moves from the ECB, optimism ahead of the US tax reform, and possibly stronger US manufacturing data, while pull factors include bets of weaker US data on durable goods orders, services, and US GDP growth.”