Yields on gov’t debt flat over inflation results

By Christine Joyce S. Castañeda
Senior Researcher

YIELDS on government securities (GS) traded in the secondary market were flat last week amid concerns over February inflation results and the central bank’s dovish comments.

On average, GS yields — which move opposite to prices — fell by 6.95 basis points (bps), data from the Philippine Dealing & Exchange Corp. as of March 9 showed.

Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines (UnionBank), said local bond yields were higher at the start of the week ahead of the release of the inflation data.

“However, it seemed that the market was a little unsure how to react initially with two inflation figures released by the PSA (Philippine Statistics Authority) resulting to yields moving sideways with a bit of upward bias,” he said.

“Towards the end of the week, the market was quiet indicating cautiousness keeping investors on the sidelines. The market is waiting for leads ahead of the US Fed (Federal Reserve) FOMC (Federal Open Market Committee) and the BSP (Bangko Sentral ng Pilipinas) Monetary Board meetings [this] week, with the Fed widely expected to raise rates by 25 bps and the BSP largely expected not to raise rates based on dovish comments [last] week,” he added.

Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines (Landbank), said: “Yields fell [last] week, as the BSP calmed investors by affirming the appropriateness of its current policy settings despite the uptick in domestic inflation.”

“Despite the overall downward bias, yields jumped significantly on Friday after the ECB (European Central Bank) became more hawkish during its policy meeting [last] week. The ECB dropped its pledge to increase its bond buying program if needed, sending a signal that it may already start tightening its monetary policy soon,” he added.

Mr. Dumalagan also noted that there was some upward correction on Friday ahead of the release of US labor reports.

A bond trader interviewed last Friday shared their views, saying: “Yields dipped during the week as market players reacted to strong dovish comments from the DoF (Department of Finance) and BSP, indicating that rate settings were appropriate despite inflation spiking at 4.5%.”

Last Tuesday, the PSA reported that using the new rebased index under 2012 prices, headline inflation stood at 3.9% last month. This was faster than the 3.4% posted in January and the 3.1% recorded in 2017’s comparable period. This was the fastest reading since September 2014’s 3.9%.

Year-to-date inflation was 3.7%, still within the central bank’s 2-4% target for the year.

Using 2006-based prices, February inflation was at 4.5%.

Meanwhile, BSP Governor Nestor A. Espenilla, Jr. said last week that inflation’s continued pickup will not necessarily push the BSP to tighten its monetary policy setting later this month.

At the secondary market on Friday, in the short end of the curve, the 91-, and 182-day Treasury bills (T-bills) inched up by 2.76 bps and 0.71 bps to yield 3.4390% and 3.6821%, respectively. The 364-day paper went down by 27.28 bps to 3.6629%.

In the belly, yields on the two-, three-, four-, and five-year Treasury bonds (T-bonds) increased by 3.70 bps (4.3328%), 54.11 bps (5.1964), 2.94 bps (5.1755%) and 18.89 bps (5.4701%). Meanwhile, yield on the seven-year bond lost 2.53 bps to 6.6286%.

In the long end, the 10-, and 20-year T-bonds saw their yields go down by 85.21 bps and 37.59 bps to 5.9390% and 6.6562%.

For this week, Landbank’s Mr. Dumalagan said yields may continue their upward trajectory this week, “fuelled by potentially firm US inflation data and likely firm US labor reports on nonfarm payrolls, unemployment rate, and average hourly earnings.”

Unionbank’s Mr. Asuncion said the market is expected to be quiet while waiting for leads “as the US Fed will probably raise rates and the BSP seemingly will stay with current rates.”

The bond trader noted market players will seek direction from inflation reports from major markets, as well as speeches from major central bankers.