Yields on gov’t debt drop on Fed hike, BSP review
YIELDS on government securities (GS) traded in the secondary market declined last week amid an interest rate hike in the US and the Bangko Sentral ng Pilipinas’ (BSP) decision to keep its policy settings unchanged.
Local debt yields, which move opposite to prices, decreased by 17.5 basis points (bps) on average week on week, data from the Philippine Dealing and Exchange Corp. (PDEx) as of March 23 showed.
“Yields fell [last] week after the policy meetings of BSP and the US Federal Reserve transpired as expected, easing worries over a faster pace of monetary tightening domestically and abroad,” Land Bank of the Philippines (LANDBANK) market economist Guian Angelo S. Dumalagan said.
The Federal Open Market Committee (FOMC) announced at the close of its March 20-21 meeting that interest rates will increase by a quarter point from 1.50% to 1.75%.
Last week’s interest rate hike marked the Fed’s sixth time to raise borrowing costs since its policy normalization began in December 2015.
Along with the US interest rate hike announcement, the Fed also bared an upgraded forecast for its gross domestic product (GDP) growth for this year to 2.7% from 2.5% in December, citing a “strengthened” economic outlook in the recent months.
On the local front, the BSP, at its Monetary Board meeting last Thursday, kept its policy settings unchanged at 3.5% for the overnight lending rate, 3.0% for the overnight reverse repurchase rate, and 2.5% for the overnight deposit rate.
“The BSP kept is policy settings steady, consistent with its initial guidance, while the US Federal Reserve hiked rates even as it maintained its prior view of just three US rate adjustments this year,” Mr. Dumalagan said.
“Before the policy decision of the US central bank, some investors were expecting four US rate hikes in 2018,” he added.
Security Bank Corp. Head of Institutional Sales Carlyn Therese X. Dulay said: “Market sentiment of no BSP policy change and speculation on a possible bond swap drove yields down by 15-18 basis points across the curve on end client demand.”
Meanwhile, a bond trader interviewed via e-mail said bond yields dropped due to a broad risk-off tone, tracking the movement of US Treasuries amid renewed trade war fears.
“[The] BSP’s no change in policy and release of inflation forecasts also boost buying with bargain hunters out,” the trader added.
The BSP last Thursday also placed its inflation forecast for the year at 3.9% from 3.8% under the new 2012 base year.
At the secondary market, all papers in the belly of the curve declined. Yields on the four-year Treasury bonds (T-bonds) declined the most, shedding 46.7 bps to fetch 4.9672%. This was followed by the five-, two-, three- and seven-year T-bonds, whose rates respectively fell by 36.1 bps (5.1624%), 22.5 bps (4.1344%), 4 bps (4.3599%), and 0.9 basis point (6.7486%).
At long end of the curve, the 10-year T-bond also declined by 21.3 bps to fetch 5.9737%, while the longer 20-year tenor gained 2.6 bps to yield 7.1889%.
Meanwhile, as for the short-term papers, the 364-day Treasury bills declined by 103.9 bps to fetch 3%, while both the 91-day and 182-day securities saw their rates increase by 29.1 bps and 28.1 bps to fetch 3.267% and 3.3071%, respectively.
For this week, LANDBANK’s Mr. Dumalagan said “there might be sideways movement in yields amid mixed signals abroad.”
“The protectionist trade policy of the US might continue to weigh down on yields. The drop in yields, however, might be tempered by likely upbeat US data on GDP growth and PCE (personal consumption expenditure) inflation. Trading activity might also be limited ahead of the Holy Week break,” he added.
For Security Bank’s Ms. Dulay, she expects market to stay within range with limited movement due to the Lenten season break, but added that “[p]articipants will also likely take their cue from the upcoming T-bill auction as well as on the release [of the] second quarter auction schedule.” — Ranier Olson R. Reusora
